European banks’ rates bonanza is peaking as savers shift money

THE boom in lending income for European banks is beginning to taper as they start paying more for deposits and interest rates approach their peak.

Europe’s largest banks posted a quarter-on-quarter drop in net interest income during the first three months of the year, snapping a streak of four large consecutive jumps that had boosted profitability last year. Several bank leaders pointed to intensifying competition and an accelerating move among customers to shift money to higher-yielding accounts as key reasons for the trend.

Net interest income in the first quarter was “probably the peak,” Commerzbank chief financial officer Bettina Orlopp said on an analyst call this week. Still, the metric will remain way above the level it used to be before the European Central Bank started raising rates last year, she said.

It’s the clearest sign yet that the biggest tailwind the European banking industry has enjoyed in over a decade is letting up. The unprecedented series of interest rate hikes has not only earned banks big windfalls on money they keep at the central bank but also enabled them to jack up the prices for loans while the rates they have been offering depositors have crept up only very gradually. 

Now, however, savers are increasingly shifting their money from sight deposits into term ones, which pay much more. The trend has been picking up since July last year, when the ECB started tightening monetary policy. It hit another high in March, according to the central bank’s latest statistical release. 

Several lenders also said that intensifying competition forces them to offer better terms. Orlopp estimated that Commerzbank will end up sharing a third of what it earns on deposits with clients by the end of the year, up from just 15 per cent in the first quarter, while UniCredit Spa chief executive officer Andrea Orcel said the pass-through rate will rise from 10 per cent to 40 per cent over the same period.

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The end to the ECB’s tightening cycle – expected this year – will play a role too as it will enable the narrowing of the spread between rates earned by banks on lending and offered by them to take on client money.

Net interest income will likely “peak” in the current or the next quarter, Orcel said on an earnings call in early May. That’s because of “the conjunction of rates in Europe getting to their maximum level and pass-through being higher,” he said. 

“If all of that happens, banks will have a very significant reversal of the NII tailwinds quite soon,” Orcel said. BLOOMBERG