Europe Bank Earnings to Offer Peek Into Negative-Rate Abyss
Comment of the Day

July 23 2019

Commentary by Eoin Treacy

Europe Bank Earnings to Offer Peek Into Negative-Rate Abyss

This article by Nicholas Comfort for Bloomberg may be of interest to subscribers. Here is a section:

The second quarter will probably provide more evidence how damaging zero or negative rates are for an industry that at its core depends on clients paying to borrow money. Revenue at eight of Europe’s top lenders is set to decline 2.7% on average from a year earlier, according to filings and analyst estimates. That compares with a 0.5% gain for the top U.S. peers, many of which still managed to post record earnings after nine interest rate increases by the Federal Reserve since late 2015.

“The focus for European banks is really on revenue,” said Jonathan Tyce, an analyst at Bloomberg Intelligence. “Rates are set to go down, which means lower loan loss provisions, but that doesn’t make up for the loss in revenue. All this keeps bringing you back to costs.”

And here is a section on Deutsche Bank

Deutsche Bank (July 24) unveiled its biggest overhaul in decades this month, including a plan to exit its underperforming stock trading business. The move was partly driven by low interest rates and the company now assumes that European short-term rates will rise to just 0% in 2021. Deutsche Bank also offered insight into second-quarter earnings with a 5.9% slide in revenue. Costs and profit figures fell short of expectations, even before the bank said it expects 3 billion euros of restructuring charges in the period. Deutsche Bank says about 75% of the investment banking businesses it wants to keep will have a top five market position, and the release this week will 

Eoin Treacy's view

The basic business model of banks, borrowing short-term to lend long-term, doesn’t work if there is no spread. It is complicated by negative deposit rates which see banks pay a fee to sustain Tier 1 capital ratios. The most LTRO program was paltry in comparison to the previous one and therefore represented a tightening of credit conditions for European banks.  This week’s earnings announcements will give us some insight into how they are faring.

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