The core business of banks is back: With the end of negative interest rates in the euro area, lending money is worthwhile again. The five largest banks in the EU, which have so far presented quarterly figures, were able to increase their net interest income by 3.74 billion euros compared to the same quarter last year, which corresponds to an increase of 17 percent. Their profits consistently beat analysts’ forecasts, although loan loss provisions and expenses also rose. France’s largest bank, BNP Paribas, was particularly strong, posting the highest quarterly profit in its history. Hypovereinsbank’s Milan parent, Unicredit, reported its highest net profit in almost five years.
Much of the success is due to the European Central Bank, which on July 21 ended eight years of negative interest rates and raised its deposit facility to zero in the face of rising inflation. The banks had already anticipated the step and demanded higher lending rates in recent months. For a decade, they struggled with declining lending revenues because interest rates were at historic lows. In mid-2014, the ECB cut its deposit rate – the interest it pays banks on deposits with the central bank – into negative territory. She wanted to get the financial institutions to give more cheap loans to companies and consumers. This step supported the economy and made financing cheaper. But it also turned banking upside down, prompting many institutions to charge their customers for deposits as well.
Now, inflation is driving up banks’ costs and they have to set aside more money for potential loan defaults as the macroeconomic outlook worsens. However, these effects have not yet become particularly evident. Overall, the five largest banks reported 50 percent more quarterly profit. Commerzbank and Paris’ Société Générale will follow this week. The future prospects are of course rather cautious. Deutsche Bank, for example, warned of serious consequences if Russia were to stop supplying gas to Germany. At the balance sheet press conference, CEO Christian Sewing predicted that such a scenario would increase risk costs by around one billion euros this year and next.
For the banks, the turnaround in interest rates naturally also means the end of the negative interest rates on customer accounts known as “custody fees”. They are also likely to lose access to the ECB’s subsidized loans, known as targeted longer-term refinancing operations (TLTROs), which have been a major source of revenue in recent years.
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