UK and Italian banks to benefit most from rising rates, study shows

By Marc Jones

LONDON (Reuters) – British and Italian banks are expected to see the biggest boost from Europe’s rising interest rates, according to a new study, while French and Dutch lenders will see barely any benefit and Swiss and Swedish banks could actually suffer.

Credit rating firm S&P Global looked at how 85 of Europe’s biggest banks, which have a combined 31 trillion euros ($33.28 trillion) of assets, will fare as the European Central Bank, Bank of England and Swiss National Bank push up borrowing rates.

It estimated that a 2 percentage points rise in rates would increase banks’ annual net interest income (NII), which is strongly linked to profitability, by an average of around 18% compared to last year.

British and Italian banking systems stand to benefit the most, with a weighted-average NII impact above 25%.

For Spanish, German, Danish, and Austrian systems, the impact stands between 10% and 16%, in France and the Netherlands it would be less than 10%, while stricter capital rules in Switzerland and Sweden could mean their banks see 29% and 5% declines, respectively.

“The actual upside to NII will also depend on two key factors that are unequal across Europe,” S&P’s report said. “How far and fast policy rates rise, and the strength of net lending against a weakening economic backdrop.”

The current high inflationary environment also will lead to rising operational costs and other credit costs for banks.

Wages for bankers are already rising. In the United States, where inflation started to increase before it did in Europe, banks’ “non-interest” expenses jumped 7.2% in first-quarter of this year compared with the year-ago quarter.

Rising interest rates also put pressure on borrowers with weaker finances, meaning more loan defaults. Specific to the euro zone, the ECB is phasing out it ultra-cheap funding offerings known as TLTROs.

The ECB estimates that the resulting hit to banks’ profits represents between 59-126 bps of return on equity, meaning 10 billion to 20 billion euros of additional interest costs for the largest eurozone banks.

Nevertheless, with inflation expected to ease next year and unemployment forecast to rise only modestly, S&P said European banks should generally see a rise in profits both this year and in 2023, although many will still barely cover their cost of capital.

“We expect rising interest rates to be a net benefit for most European banks under our base case, but the benefit to NII could vary significantly,” S&P said.

($1 = 0.9314 euros)

(Reporting by Marc Jones; Editing by Bill Berkrot)