The rise in interest rates over the past two years has enabled European banks to significantly increase their net interest income: in 2023, according to UBS, it was more than EUR 100 billion higher than in 2021.
Data collected by UBS show that net interest income (NII) of European banks amounted to EUR378 billion this year, compared to EUR270 billion two years earlier.
At the same time, lending volumes grew by only 2% over the same period. Thus, the increase in the NII is mainly due to an increase in the difference between the rates at which banks issue loans and those at which they pay on deposits, the Financial Times notes.
The increase in revenues allowed European banks to increase distributions to shareholders in the form of dividends and share buybacks to EUR121 billion in 2023 from EUR90 billion in 2021, UBS notes. Due to this, the share prices of many banks have grown steadily, but the ratio of prices to book value of almost all European financial companies is significantly lower than that of comparable American banks.
The main concern for bank executives now is the expected reduction in key interest rates by the world’s leading central banks next year, which is likely to have a negative impact on net interest margins, which have recently recovered from a decade of negative or near-zero rates.
Fears of a recession, weakening demand for loans and stricter capital requirements for banks are limiting the growth of share prices in the sector, the FT writes.
An additional factor that worries investors is a possible increase in the number of loan defaults.
According to the UBS forecast, European banks’ allocations to loan loss provisions will reach EUR63 billion in 2024, up from EUR31 billion in 2021.
