The turnaround in interest rates will not bring any relief for the time being

Banks in Frankfurt

The financial institutions’ net interest income is likely to increase. In relation to equity, however, the consequences of the reversal in interest rates may run out, warns consulting firm Bain.

(Photo: dpa)

Frankfurt The German banks and savings banks must prepare for the fact that the consequences of the interest rate reversal will largely disappear in 2026. This is according to a study carried out by the consulting firm Bain. “The hoped-for positive effects of the turnaround in interest rates will not materialize for the time being,” Bain partner and co-author of the study, Sebastian Thoben, said on Tuesday.

Thoben pointed out that in the short term the banks would have to cope with higher financing costs. Since many loans have a long-term fixed interest rate, rising interest rates only gradually affect earnings.

Another factor Thoben cited is that new business is likely to decline given the “price shock” from higher interest rates. An impending recession can also slow down business.

In absolute terms, according to the Bain forecast, net interest income could increase by up to 12 billion euros over the next five years. In relation to the strongly increasing equity, however, the net interest income will only be slightly above or even below the level in 2021. Without countermeasures, the bottom-line return on equity could even fall.

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In the longer term, however, according to Bain, the financial industry can expect positive effects: in ten years it will probably look very different, said Thoben.

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In terms of earnings, the banks are already benefiting from the turnaround in interest rates. Commerzbank, for example, increased net interest income significantly in the third quarter of 2022. Also at Deutsche Bank, net interest income in business with private and business customers was above the level of the previous year. For the analysis, Bain analyzed the balance sheet and earnings structures of the last 1,440 credit institutions in Germany.

Further interest rate increases from the ECB are expected

After several years of negative interest rates, the European Central Bank (ECB) raised interest rates significantly this year. The deposit rate, which banks receive for excess liquidity they keep at the central bank, rose from minus 0.5 percent to 1.5 percent. Due to the high inflation in the Eurozone, the ECB is expected to raise interest rates again this Thursday.

The lending business plays an enormous role for German banks. Even in 2021, net interest income accounted for 65 percent of the total income of all German institutions.

The Euro logo in front of the former headquarters of the European Central Bank

The ECB has raised interest rates sharply in recent months.

(Photo: dpa)

So far, Bain also notes, “there is no sign of any customer reluctance”. “On the contrary: In the third quarter of 2022, the amount of new business for all loans was almost 20 percent above the previous year’s figure.” However, the consulting firm expects that this effect will be reversed in 2023, “especially because the willingness to invest traditionally falls in a possible recession”.

A change in behavior among private customers can also be expected. “Rising interest rates make it more difficult for private buyers to acquire their dream property when prices are still high. In times of economic stress, demand for consumer credit is also likely to decline,” Bain predicts.

It is clear that the reversal in interest rates will have a negative effect elsewhere in 2022, especially for savings banks and cooperative banks. You must make write-offs due to price losses on securities.

Already in the first six months of the year, the rapid increase in interest rates led to large valuation losses in securities holdings. At savings banks and credit unions, write-downs totaled 12.3 billion euros, as the Bundesbank recently determined. This corresponds to around 5.6 percent of the actual core capital. However, the financial institutions usually keep these papers until maturity, so that the price losses are offset again.

More: German companies prepare for the downturn – and hoard 765 billion euros.

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