Continental Europe’s banks are in a income funk. Behind the earnings downgrades are fears persistently low rates of interest will make lending margins tougher to eke out. Germany’s Deutsche Financial institution and Commerzbank commerce at among the monetary sector’s lowest valuations. May a hawkish compatriot as head of the European Central Financial institution assist?
Jens Weidmann, Bundesbank president, itches to tighten financial coverage greater than different candidates to succeed Mario Draghi as ECB president in October. However Mr Weidmann won’t be any more practical in reviving financial institution shares.
Possibilities of an rate of interest rise quickly are low. Traditionally, the US takes the lead. Certainly, markets anticipate the US Federal Reserve to chop charges this 12 months. The ECB’s authorities board anyway acts by consensus. Even when all colleagues are persuaded to boost rates of interest — maybe in distant 2020 or 2021 — the margin affect might be lower than assumed.
When the Fed was elevating rates of interest, shareholders cheered as US banks expanded their margins. European banks’ better reliance on deposit funding means they have an inclination to cross extra of official fee rises on to depositors. Mortgage books signify solely about three quarters of deposits at US banks, in line with Berenberg. In Europe they’re roughly equal.
True, southern Europe financial institution lending charges are extra versatile than within the continent’s north. That might increase curiosity margins at banks resembling Spain’s Santander or Italy’s UniCredit. But, any useful results could be worn out if the nations’ dangerous mortgage woes multiplied.
Eurozone banks’ returns on fairness will drop to only 5.5 per cent this 12 months, down from a paltry 6.2 per cent late final 12 months, the ECB forecast this week. Estimates for 2021 look little higher, having been revised down lately.
The ECB admits lower-for-longer rates of interest are largely guilty. However extra operational enhancements, it argues, are wanted for higher profitability. So is a stronger financial system. And that requires a softer contact on rates of interest. Mr Weidmann’s strategy will hinder somewhat than increase financial institution valuations.
If you’re a subscriber and wish to obtain alerts when Lex articles are revealed, simply click on the button “Add to myFT”, which seems on the high of this web page above the headline.