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DBRS: Low-rate burden will be 'more visible' in European banks' revenues in 2020

The impact of the persistently low-interest rates in Europe will become "more visible" in the 2020 revenues of banks domiciled in leading economies on the continent, rating agency DBRS Morningstar said in a report Jan. 16.

The economic slowdown in Europe is expected to continue in the year ahead and asset growth will stagnate as a result. Against this background, it will be more challenging for banks to mitigate the low-interest rate burden on their revenues, the agency said in an annual banking outlook report.

Negative rates

Amid the slower asset growth and continued strong competition in the sector, lenders will find it difficult to grow their loan books further, Vitaline Yeterian, senior vice president at DBRS' global financial institutions group said in a presentation of the report Jan. 16. Furthermore, most European banks have already reduced customer deposit rates to zero or close to zero and they now need to decide whether to pass on negative rates to more depositors, she said.

Big European banks have already started charging negative rates not only on corporate but also on large retail deposits. But this measure also has its limitations given that it is still unclear how it will affect the banks' relationship to customers, according to the DBRS analysis.

"As long as rates remain ultra-low, the pressure on banks' net interest income is likely to continue," Yeterian said.

Based on the latest data released by the European Banking Authority in November 2019, DBRS has estimated that the European banks in its sample have lost around 1% of NII per year since the ECB introduced negative rates in June 2014. Over the five years to June 30, 2019, the banks' total aggregate NII from loans has shrunk to €271 billion from €282 billion, DBRS said. This happened despite their well diversified franchises and the revenue growth generated by mergers and acquisitions, the agency noted.

Despite differences by country, net interest margins from loans have also been on the decline across the whole DBRS sample since 2014. On average, the NIM from loans fell to 1.60% as of June 30, 2019, from 1.90% in 2014, the agency said. The rating agency sees continued pressure on bank NIMs in the future.

Continued pressure

The pressure on NII from loans is bound to continue in 2020 given the ECB's monetary policy, with no return to positive rates likely in the foreseeable future, DBRS said.

However, there is also good news, as the deposit rate tiering introduced by the ECB last year will provide banks in the euro area with some relief. The new scheme allows them to hold excess cash of up to 6x their mandatory reserves at no cost, the agency has estimated.

In Sweden, the central bank recently set rates to zero from minus 0.25% previously and in the U.K., the Bank of England still holds its base rate at 0.75%. The latter could potentially be cut if the British economy is affected by Brexit, DBRS noted.

DBRS' sample, which the agency considers illustrative of the broader European banking sector, features the leading banks in France, Germany, Italy, the Netherlands, Spain, Sweden and the U.K., including BNP Paribas SA, Groupe BPCE, Crédit Agricole SA, Société Générale SA, Deutsche Bank AG, Commerzbank AG, DZ BANK AG, Banco BPM SpA, Banca Monte dei Paschi di Siena SpA, Intesa Sanpaolo SpA, UniCredit SpA, Unione di Banche Italiane SpA, ING Groep NV, Rabobank, ABN AMRO Bank NV, Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA, Banco de Sabadell SA, Bankia SA, CaixaBank SA, Svenska Handelsbanken AB (publ), Skandinaviska Enskilda Banken AB, Swedbank AB (publ), HSBC Holdings PLC, Barclays PLC, Lloyds Banking Group PLC and Royal Bank of Scotland Group PLC.