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European banks will reveal a boost to profits from higher interest rates when they report results this week, but face pressure to find new engines of growth as central banks’ efforts to tighten monetary policy near an end.
The continent’s biggest lenders kick off third-quarter earnings with most expected to show a further increase in net interest income, the difference between what banks pay on deposits and what they earn from loans.
Net interest income has been the key driver of profits for banks on both sides of the Atlantic for at least a year, cushioning the blow for some lenders from the still weak volume of mergers and acquisitions.
With the European Central Bank having started lifting rates after the US Federal Reserve and Bank of England, analysts expect European banks to continue to show the benefits from the tightening cycle. The ECB last month raised rates to a record 4 per cent in a bid to bring down inflation.
Barclays analyst Paola Sabbione said she expected Italian banks to report a jump in net interest income for the third quarter.
“This is the third-quarter picture we have in mind for the Italian banks, suggesting capital will continue to build up, paving the way to distribution surprises in the fourth quarter,” she said.
UniCredit, Italy’s second-biggest bank, reports results on Thursday. Intesa Sanpaolo, the country’s largest lender, releases earnings on November 3. Spanish banks, including Santander, which reports on Wednesday, are also expected to show further gains in net interest income.
According to analysis by rating agency S&P, Spanish and Italian lenders have also passed on a smaller portion of the benefits of higher rates — known as deposit beta — to depositors than other banks, including those in the UK.
The tailwind enjoyed by European banks has helped send the Stoxx Europe 600 Banks index up 11 per cent this year, outpacing the 3 per cent gain in the broader Europe Stoxx 600.
But with most economists predicting that last month’s increase by the ECB will prove its last, European bank executives are likely to be pressed by investors and analysts on how they will drive profits over the longer term.
Andrew Coombs, analyst at Citi, expects any “moderate decline in net interest margins”, to be manageable because he expects loan losses for the banks to be limited.
UK banks were among the first to benefit from rising interest rates, given the Bank of England began tightening monetary policy in December 2021, more than six months earlier than the ECB.
But with investors now betting that UK interest rates have peaked and the mortgage market struggling, analysts expect the country’s biggest banks to have endured a more difficult third quarter.
“Q3 could be a tough quarter [for UK banks], with deposit migration, spread compression and low mortgage volumes persisting,” said RBC analyst Benjamin Toms.
In contrast to European lenders, shares in UK banks have struggled this year. Shares in Barclays, which reports on Tuesday, are down 9 per cent, while Lloyds Banking Group stock has fallen 8 per cent. Lloyds reports results on Wednesday. Shares in state-backed NatWest, which reports earnings on Friday, have declined 18 per cent this year.
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