London – An extended period of low interest rates amplifies the revenue pressure long felt by European banks, but the fear must be that revenues are in a secular, rather than cyclical, decline.
According to ECB figures, between 2009 and 2014, net interest income across the EU fell to €406 billion from €537 billion. This drop was only partially offset by a rise in net fee and commission income to €262 billion from €233 billion, as banks levied charges for refinancing loans and encouraged clients to buy insurance and savings products.
An S&P Global Market Intelligence sample of 10 European banks shows that net interest income dropped year over year in the first quarter for all except Banco Bilbao Vizcaya Argentaria SA and UBS Group AG. BBVA’s figures were distorted, however, by the integration of Türkiye Garanti Bankasi AS; when including Garanti in the prior-year figures, BBVA reported a 3.3% drop in net interest income.
Market volatility saw clients sitting on their hands particularly in January and February 2016. This depressed trading income for most banks, with year-over-year comparisons hurt as well by a particularly strong first quarter of 2015. This in turn meant that net interest income and fee income rose generally as a percentage of operating profits, not just at the leading investment banks but also at the more traditional retail and corporate banks.
There are reports of better wholesale trading in March and April, but the first quarter tends to be seasonally the strongest, and the “missing” first-quarter revenues are unlikely to be made good in the rest of the year. Although loose monetary policy is contributing to reduced bad-loan provisions, these falls tend to offset weak revenues only in part.
Investment banks are not alone in restructuring and cost-cutting as managements adjust to shrinking revenues, but given that returns tend to decline over the course of the year, the single-digit figures reported by all except Nordea would appear to be a bellwether.
Meanwhile, figures showing risk-adjusted margins in Europe’s major economies underscore lenders’ dependence on the macroeconomic background. Recession together with high risk costs hit Spain’s banks in 2012 and Italy’s banks from 2011 onward.
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