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Higher Rates on the Horizon: Structurally Positive for EU Banks’ Revenues

This commentary looks at the impact of potentially higher interest rates on European banks’ profitability.
Key highlights include:

• Higher interest rates appear to be on the horizon, although the timing is unclear. This would structurally be positive for European banks’ revenues after a long period of ultra-low interest rates.

• At the same time, the impact of the pandemic on banks’ asset quality remains difficult to assess, and we are still in a “wait and see” situation. An increase in interest rates could accelerate asset quality deterioration beyond the associated increase in revenues, although when and how quickly rates increase are key considerations.

• If interest rates are increased in response to a recovery in the economic environment, this is likely to coincide with increasing income and wages. In this environment, European banks’ revenues would likely benefit while customers’ loan repayments would largely remain manageable.

“DBRS Morningstar notes the implications of potentially higher interest rates are important for European banks’ profitability. When and how quickly interest rates increase, and whether an increase reflects a sustainably stronger economy, are key considerations” said Vitaline Yeterian, Senior Vice President – Global FIG.