European banks are keeping the vast majority of the benefit from rising interest rates to themselves, helping to drive profits in the industry to decade highs.
(Bloomberg) — European banks are keeping the vast majority of the benefit from rising interest rates to themselves, helping to drive profits in the industry to decade highs.
“There has been no material passing on of rates to customers,” Commerzbank Chief Financial Officer Bettina Orlopp said on an analyst call Thursday. Although Commerzbank may raise interest rates on deposits as competition for them is intensifying, there’s a good chance the rate, known in industry parlance as ‘deposit beta,’ will remain below the 30% level Commerzbank currently assumes as this year’s average, Orlopp said.
Commerzbank’s comments follow similar statements from some of the regions biggest lenders including UniCredit Spa, Santander SA, Intesa Sanpaolo SpA and Deutsche Bank AG. All have said they’re currently passing on only a fraction of what they’re earning on deposits after the rapid interest rate hikes implemented since last year by the European Central Bank.
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The rate hikes have been the key driver behind last year’s surge in net interest income and the resulting boost to banks’ bottom lines, which in many cases hit the highest level since before the Great Financial Crisis. That’s also been a big reason for the strong performance of many bank stocks, with the Bloomberg Europe 500 Banks and Financial Services Index rising more than 17% since the beginning of the year.
Commerzbank is “on cloud nine,” Berenberg analysts led by Michael Christodoulou said in a note Friday after the lender’s share surged more than 11% the previous day when it gave upbeat deposit beta guidance for 2023. The chance for higher interest income on the back of the low pass-through rate is “a key attraction of the bank,” the analysts wrote.
Several lenders have faced a consumer backlash over the low pass-through rate. The banks have responded by saying that they’ve begun to increase interest rates on many kinds of deposits, especially term ones. They have also argued that the current situation is just a reversal from the decade-long era of negative official interest rates, when banks were unable to pass those costs on to clients.
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