The interest surplus of the financial institutions is likely to increase. In relation to equity, however, the consequences of the turnaround in interest rates could fizzle out, warns the consulting firm Bain.
(Photo: dpa)
Frankfurt The German banks and savings banks have to adjust to the fact that the consequences of the turnaround in interest rates will largely fizzle out by 2026. This is the result of a study by the consulting firm Bain. “The hoped-for positive effects of the turnaround in interest rates will not materialize for the time being,” said Bain partner and co-author of the study, Sebastian Thoben, on Tuesday.
Thoben pointed out that the banks would have to cope with higher financing costs in the short term. Since many loans have a long-term fixed interest rate, the rising interest rates only gradually affect earnings.
Another factor Thoben cited is that new business is likely to fall given the “price shock” from higher interest rates. An impending recession could also slow down business.
In absolute terms, according to the Bain forecast, net interest income could increase by up to EUR 12 billion over the next five years. In relation to the sharply increasing equity, however, the net interest income will only be slightly above or even below the level of 2021. Without countermeasures, the bottom line return on equity could even decrease.
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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, banks are already benefiting from the turnaround in interest rates. Commerzbank, for example, significantly increased net interest income in the third quarter of 2022. At Deutsche Bank, too, net interest income in business with private and corporate customers was above the previous year’s level. For the analysis, Bain analyzed the balance sheet and earnings structures of the last 1,440 credit institutions in Germany.
Further interest rate hikes by the ECB expected
After several years of negative interest rates, the European Central Bank (ECB) raised interest rates significantly this year. The deposit rate, which banks get for excess liquidity they keep with the central bank, rose from minus 0.5 percent to 1.5 percent. Given the high inflation in the euro zone, the ECB is expected to hike 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 institutes.
The ECB has raised interest rates sharply in recent months.
(Photo: dpa)
So far, Bain also notes, “there is no sign of any reluctance on the part of the customer”. “On the contrary: In the third quarter of 2022, the volume of new business for all loans was almost 20 percent above the previous year’s figure.” However, the consulting firm expects this effect to be reversed in 2023, “especially since the willingness to invest traditionally decreases in a possible recession”. .
A change in behavior can also be expected among private customers. “Rising interest rates are making 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,” predicts Bain.
It is clear that the turnaround in interest rates will have a negative impact elsewhere in 2022, especially for savings banks and cooperative banks. You have to make write-offs because of price losses of securities.
Already in the first six months of this year, the rapid increase in interest rates led to high valuation losses in securities portfolios. 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 common equity tier 1 capital. However, the financial institutions usually hold these papers until maturity, so that the price losses are offset again.
More: German companies are arming themselves for the downturn – and are hoarding 765 billion euros.