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European banks brace for 'lower for longer' interest rates

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European banks brace for 'lower for longer' interest rates

Banks across Europe are under pressure from the low interest rate environment, which is set to continue for longer than expected after the ECB signaled that a further rate cut could be on the horizon.

The ECB's main refinancing rate has been zero since March 2016, having dropped sharply in the aftermath of the global financial crisis. Low rates inhibit the ability of banks to earn interest income, a key source of revenues.

In July, the central bank said it expects its key interest rates to remain "at their present or lower levels" at least through the first half of 2020 and that it is examining additional measures aimed at mitigating the impact of negative rates, including a so-called tiered deposit rate system.

The move drew negative reactions from some European bank executives, with Société Générale SA Deputy CEO Philippe Heim telling CNBC that the continued dovish ECB policy is "not good news" and Credit Suisse Group AG CEO Tidjane Thiam saying he is "not a great fan" of low interest rates. Barclays PLC CEO Jes Staley, however, took a more positive stance, saying banks will benefit from the economic growth that results from low rates.

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Meanwhile, Deutsche Bank AG CFO James von Moltke said "tiering," which would exempt banks from paying some charges for holding deposits at the ECB, is a measure the central bank could take to lessen the negative impact of prolonged low rates.

Other bank executives also weighed in on tiering, with ING Groep NV CEO Ralph Hamers saying: "I think that it will help banks, but I think that we have to move away from the policy that is currently being anticipated." Crédit Agricole SA CFO Jérôme Grivet said he does not expect the French bank's results to see a significant improvement from tiering, but that it would depend on the type of tiering that would be implemented.

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Impact on targets

During second-quarter earnings calls, several European banks warned that lower-than-expected interest rates would hurt key targets and metrics. Italy's UniCredit SpA slashed its full year revenue target by €300 million, while Spanish lenders Banco de Sabadell SA, CaixaBank SA and Bankia SA also cut key 2019 targets.

Dutch lender ABN Amro Bank NV expects low interest rates to shave around €20 million off its net interest income per quarter through 2020, while Germany's Commerzbank AG said it could take a €50 million hit on its full-year net interest income if the ECB makes a 10-basis-point cut and warned that its aim of lifting profit this year is looking "significantly more ambitious."

Rethinking strategies

In France, BNP Paribas SA CFO Lars Machenil told CNBC that the bank has stepped up efforts to adapt to the low interest rate environment to enable its bottom line to grow, while Crédit Agricole said it is restructuring its life insurance products to ease the impact of ultra-low rates.

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Moreover, UBS Group AG said it plans to soften the blow of expected rate cuts through regional and business diversification, among other measures. The bank recently confirmed plans to levy a negative interest rate of 0.75% on wealthy clients with more than CHF2 million in deposits, while rival Credit Suisse said it was considering following suit, Reuters and the Financial Times reported.

It is not all bad

Some banks, however, struck a positive tone amid the gloomy interest rate environment.

Banco Santander SA CEO José Antonio Álvarez said he was "optimistic" about the lender's net interest margin, while his counterpart at Spanish peer Banco Bilbao Vizcaya Argentaria SA, Onur Genç, said the bank's overseas operations, where it generates the bulk of its income, should help it mitigate the impact of low interest rates and that the lender will likely benefit from the current environment over the mid- to long term.

Meanwhile, Société Générale CFO William Kadouch-Chassaing said the French bank's diversified model would help protect it against low rates.