Europe’s banks post record profits – Economy

There hasn’t been such good news for the shareholders of European banks for a long time: Suddenly many financial institutions are posting record profits again – or at least the highest profits for more than ten years. Concerns that war, inflation and the energy crisis could even trigger a new financial crisis seem almost forgotten: on Tuesday reported the major French bank BNP Paribas a record profit of 10.2 billion euros. The Swiss UBS (7.6 billion euros) and the Italian Unicredit (5.4 billion) had previously presented good figures.

Even the Deutsche Bank (also more than five billion euros) and permanent problem child Commerzbank it is better: The latter should now after years of shadowy existence in the small-cap index MDax even back in the Dax rise, the bel étage of the German stock market indices. “All engines in the group ran well,” said BNP boss Jean-Laurent Bonnafé on Tuesday, probably speaking from the heart of many colleagues in the boardrooms.

What’s going on with Europe’s banks, which have at best been moderately successful recently, at least compared to the prosperous American financial institutions? Whence suddenly record profits, at a time when people are groaning under inflation and companies are under high energy prices? And above all: who will benefit from this? Shareholders about higher dividends? Or also at some point the customers? In Germany, investors still have to be fobbed off with measly interest rates for call money, one “big interest mess”as the Picture-Newspaper recently headlined.

The general conditions are excellent

In fact, banks and savings banks seemingly ideal framework conditions. Above all, monetary policy is obviously helping most financial institutions far more than it is harming them. The latter would also have been possible, since rapid interest rate hikes can also a lot of mischief in bank balance sheets dish. In order to combat inflation, the European Central Bank (ECB) raised its key interest rate after a decade of zero and negative interest rates, and did so unusually quickly, most recently by a further 0.5 percent and now to 2.5 percent.

The banks benefit massively from this, on the one hand because they get more themselves if they park their excess deposits with the ECB. Loud Calculations by the organization Finanzwende In this way, German financial institutions alone can book around 27.4 billion euros in risk-free income in the current year, provided that the ECB raises the key interest rate by another 0.5 percentage points by the middle of the year, as expected. In addition, the interest rates for new loans granted by the banks, for example for home builders or companies, have risen roughly in step with the key interest rate. According to the rating agency Standard & Poor’s (S&P), this is leading to “profitable growth, supported by rising interest margins” for the banks. In addition, there were strong fluctuations on the capital markets, which at the beginning of 2022 still led to comparatively high income in investment banking. Last but not least, the economy was better than expected. Also thanks to the courageous state aid, a wave of company bankruptcies has so far not materialized: At the moment, there is a risk of moderate loan defaults at best.

But who now benefits from the high yields and profits? The shareholders or the customers? You have to know that a large part of the bank’s income traditionally goes into the pockets of the employees, through high bonuses and fixed salaries, especially in investment banking. Hardly any other sector earns as well as the financial sector. In 2021 there were again almost 2000 income millionaires at Europe’s banks, almost 600 of them in Germany. In 2022, the number is likely to have increased further.

Banks – like all other companies – can put aside the remaining profit on their balance sheet. In some cases, they even have to do this in order to strengthen their equity. Above all, the financial supervisors have been making sure that banks have sufficient loss buffers for crises since the financial crisis at the latest. Those who lack this must hold back on lending and may not pay out dividends or buy back their own shares. During the corona epidemic they had it Supervisors even temporarily restrictedto distribute profits to shareholders. Now that is possible again, which is why many banks want to catch up.

It takes time for overnight interest rates to rise

And the customers? Of course, the bottom line would be less for the financial institutions if they paid higher interest rates for overnight money across the board. Only a good 0.7 percent offer banks and savings banks in Germany on average for these accounts. With eight percent inflation, wealth there is just melting away.

Karsten Junge from the consulting firm Consileon does not believe that this will change any time soon. “Many banks have no interest in additional savings deposits,” says the banking expert. After all, the institutes would always have to think carefully about how they could earn money with the deposits in the long term. First, those credit institutions whose business model depends on deposits would raise interest rates, then those who wanted to draw attention to themselves, such as the financial start-up recently Trade Republic. Only then could Commerzbank, Deutsche Bank, Savings Banks and Volksbanks follow. The topic “there is interest again” has probably not yet arrived in the collective psyche, said Junge. For the time being, therefore, still good conditions for banks.