UniCredit leads trio of European lenders alarmed by low rates
Germany’s Commerzbank and Dutch lender ABN Amro also warn of testing backdrop
Large European banks lined up on Wednesday to warn that the low interest rate environment would hurt their earnings, wiping hundreds of millions of euros off their market valuations.
UniCredit, Italy’s second-largest bank by market capitalisation, cut its revenue forecast for this year to €18.7bn from €19bn due to what chief executive Jean Pierre Mustier described as the “prevailing environment, with rates expected to be lower for much longer”.
Commerzbank, the German lender, warned that its profit target for 2019 was now looking “significantly more ambitious”, noting that leading central banks had “tempered their interest rate . . . expectations” because of a darkening economic outlook.
Meanwhile, ABN Amro, the Dutch bank, said that low interest rates would hit its net interest income, the amount it earns on lending minus its financing costs, owing to lower deposit margins.
“The second-quarter earnings season for European banks has been largely disappointing,” said Ronit Ghose, an analyst at Citi. “Many banks have undershot revenue forecasts. Bearish outlook guidance, especially on net interest income, has reflected an increasingly negative interest rate environment.”
The warnings from some of Europe’s largest lenders underscored how global banks are scrambling to position their businesses for a “lower for longer” interest rate environment.
Central banks in Europe, the US and the UK have either cut or are poised to cut interest rates to support the global economy at a time of escalating geopolitical turmoil, including trade tensions between China and the West and the growing prospect of a hard Brexit.
Central bankers in India, Thailand and New Zealand also cut interest rates by more than markets had expected on Wednesday in a bid to boost growth in their economies.
Shares in the trio of European lenders — which all reported first-half results on Wednesday — were lower in early afternoon trading, equating to a reduction of more than €840m in their combined market capitalisation.
Record-low interest rates are already weighing on banks’ profits as they have been forced to lower borrowing charges and in some cases pay to store money at central banks, without a similar reduction in the rates they pay to savers.
Until recently, many eurozone lenders had been hoping that the European Central Bank would increase interest rates for the first time in half a decade, leading to a recovery in the income they generate by lending to consumers and businesses.
But now the ECB is expected to cut its deposit rate from minus 0.4 per cent to minus 0.5 per cent next month — with some economists predicting that the central bank will go further in loosening monetary policy.
“As client rates are close to zero, it will be increasingly difficult to offset the decline and over time margin pressure will increase further,” warned Kees van Dijkhuizen, the outgoing chief executive of ABN.
The warnings from some of Europe’s largest lenders echoed similar concerns at banks in the US, where the Federal Reserve cut interest rates last month, and the UK, where the Bank of England is expected to do the same.
Until now, most large European banks have refrained from passing on the cost of negative interest rates to individual clients, although some have implemented charges for corporate customers.
But last week the Financial Times revealed that UBS, the Swiss bank, was preparing to levy a negative interest rate on wealthy clients with cash deposits of more than SFr2m, and Credit Suisse, its main rival, said it was considering following suit.
Ralph Hamers, the chief executive of ING, ABN Amro’s larger rival, recently launched an unusually outspoken attack on the ECB’s negative interest rate policy, which he suggested was backfiring.
“I actually see that the negative rate environment is making consumers so uncertain about their financial environment that they’re starting to save more rather than less,” he said.