Although the largest domestic money house achieved the highest quarterly profit in nine years, the share slipped significantly into the red on Tuesday at the start of trading.
(Photo: Reuters)
That actually all looks very reassuring: Deutsche Bank has achieved the best quarterly result in nine years, the Swiss UBS has even had the best start to the year since 2007, even Commerzbank reports a doubling of profits in the first three months – and all that despite of the economic turmoil caused by the Ukraine war.
Will 2022 still be a good year for banks? After all, the change in monetary policy in the euro zone is still pending – and with it the end of the negative interest rates that the banks have been complaining about so bitterly for years.
Despite the positive surprises of the past few days, it is still far too early to give the all-clear. There are three reasons for this. The greatest risk for the industry remains the economic consequences of the war in Ukraine, which are at best only partially reflected in the figures for the first quarter.
Although the banks are increasing risk provisions, the really serious scenarios such as a deep recession in Germany or the world are usually not yet taken into account. The history of President Vladimir Putin’s war of aggression against the smaller neighboring country so far has shown that it is never wrong to assume the worst case scenario.
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The second risk for the banks is inflation and the increasingly tight labor market. Deutsche Bank CFO James von Moltke speaks of a real “battle for talent” in the industry. Already in the past year, many banks had to significantly increase the salaries of their employees, both for junior staff and for experienced specialists. Wage inflation hits the banks particularly hard because personnel expenses often make up half of the total cost pool.
Higher loan defaults are imminent
Even the turnaround in monetary policy is not clearly positive news for the financial institutions, and that brings us to the third risk. Although higher interest rates fundamentally improve the institutions’ earnings opportunities, they also make it more difficult for customers to service their loans. There is a risk of higher defaults – especially if the overall economic situation deteriorates at the same time due to the consequences of the Ukraine war. In addition, refinancing is becoming more expensive for financial institutions.
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In the various stress tests of the past few years, all major banks have theoretically simulated external shocks such as a steep rise in market interest rates, but in practice most European bankers lack the experience of how to deal with an inflation scenario that can be taken even halfway seriously.
All in all, this means that the risk that the banks will still cause negative surprises this year is significantly greater than the chance that they will also be able to exceed expectations in the coming quarters.
More: Credit Suisse confirms board restructuring – first-quarter loss is higher than expected