Rising borrowing prices are giving Europe’s struggling banks a much-needed boost, but there is a catch.
As the U.S. Federal Reserve and subsequently the European Central Bank took steps toward tightening last year, the central banks put an end to a decade of ultra-low interest rates.
The rise in lending helped two of Europe’s largest business and mortgage lenders, Sweden’s SEB and Spain’s Sabadell, announce recent good profits for 2022.
Although higher rates are beneficial for bank profits, they signal a downturn in an economy that has been harmed by the conflict and skyrocketing prices that are putting pressure on borrowers and might burst price bubbles, most notably in the real estate market.
Related: When European stocks open, banks give them a boost.
Banks benefit from higher interest rates, which is positive, according to Jerome Legras of Axiom Alternative Investments. But the danger of credit losses is significant, and the economic outlook is uncertain.
Investors want banks to keep paying out, so they will closely monitor what they say about the future.
Top European lenders, including Switzerland’s UBS, Italy’s UniCredit, and the Dutch bank ING, will present their 2022 results in the coming days and discuss how that trend is hurting them.
One of the main loan markets in the area and the one where rates have increased the quickest in western Europe is Britain.
Despite the shaky state of the economy, British banks have indicated they anticipate earnings to rise in 2023. NatWest, one of the country’s largest retail lenders, plans to increase its returns on equity, a crucial indicator of profitability.
Later in February, the results of three more major British banks, HSBC, Standard Chartered (OTC:SCBFF), and Barclays (LON:BARC), are released.
PRECARIOUS
Trouble looms in the distance.
According to company recovery agency Begbies Traynor Group, there were 23,885 court judgements against UK businesses that owed money in the final quarter of 2022, an increase of more than half year over year and a symptom of escalating concern among small enterprises.
Banking strategy expert at Accenture, Tom Merry, remarked, “It’s a bit of a conundrum for the banks since… they’re supporting consumers who are struggling every day” (NYSE:ACN).
The British real estate market is likewise shaky. The fourth quarter of last year saw a 2.5% decline in home values, the largest three-month decline since the financial crisis.
After ex-prime minister Liz Truss’ tax-cutting proposals in September caused market upheaval, lenders pulled over 1,700 mortgage products in a week before returning them at rates that were 1-2 percentage points higher. Borrowers will be harmed by this.
According to CBRE’s Monthly Index, the value of commercial real estate, such as office space, decreased as well, falling by an average of more than 13% in 2022.
BlackRock (NYSE:BLK), M&G, and other companies decided to halt some withdrawals from property funds as a result of investor fears and attempts to withdraw money. The assets in question are worth about 15 billion pounds.
According to Jackie Bowie of risk management company Chatham Financial, banks may need to invest more money in pricey real estate deals.
A similar picture is developing in Germany. The largest lender in the country, Deutsche Bank (ETR:DBKGn), is benefiting from higher interest rates and is anticipated to report a profit for the eleventh straight quarter, the longest run in at least ten years.
Analysts predict that its corporate and retail divisions would benefit most from higher rates, while its global investment bank’s earnings will likely decline due to a slowdown in dealmaking.
Related: European banks do well on the U.S. Fed’s stress test and have a lot of capital.
but dangers still exist. The European Banking Authority examined the more than 1.3 trillion euros in commercial property financing across the European Union and found that banks in Germany and Austria have been particularly active in this sector.
Germany’s financial watchdog, BaFin, recently issued a warning that loans may default if interest rates rise quickly, which might be burdensome for some institutions.
As significant corporate financial transactions like takeovers or stock market listings decline, deal-making is unlikely to help banks. This led to a wave of job cuts on Wall Street.