# European banks cash in on rising rates as clouds gather
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-10-26
Category: FINANCE
Category URL: https://financedigest.com/category/finance
Meta Title: European Banks Warn of Growing Risks Amid Strong Profits
Meta Description: Discover how European banks are thriving amid economic challenges, with rising profits but potential risks on the horizon. Learn more here.
URL: https://financedigest.com/european-banks-cash-in-on-rising-rates-as-clouds-gatherhtml

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By Tom Sims, John O’Donnell and Jesús Aguado

FRANKFURT (Reuters) – Some of Europe’s largest banks warned of growing risks as the economy fizzles after posting stronger-than-expected profits on Wednesday, helped by a trading boom in volatile markets and higher interest rates.

The boost from the rising cost of borrowing, kept at rock bottom since the financial crash more than a decade ago, is a relief for banks, although it risks causing other problems, like hitting demand for loans and bursting property price bubbles.

In Germany, Deutsche Bank posted a better-than-expected jump in third-quarter profit as a trading boom at its [investment](https://www.financedigest.com/credit-agricole-launches-china-ma-and-investment-banking-business.html "Credit Agricole launches China M&A and investment banking business") bank offset a nosedive in dealmaking.

And Italy’s UniCredit raised its 2022 profit goal, helped by [higher interest rates](https://www.financedigest.com/dollar-jumps-as-powell-flags-higher-terminal-rate.html "Dollar jumps as Powell flags higher terminal rate") and lower loan loss provisions that also drove quarterly earnings above forecasts.

Results from Britain’s Barclays, Spain’s Santander, and [Standard Chartered](https://www.financedigest.com/first-abu-dhabi-bank-reiterates-not-eyeing-offer-for-standard-chartered.html "First Abu Dhabi Bank reiterates not eyeing offer for Standard Chartered"), which earns most of its revenue in Asia, also positively surprised investors.

The rosy results contrast with an increasingly bleak outlook, with war in Ukraine, soaring inflation, [energy shortages and expected economic contraction](https://www.financedigest.com/french-energy-suppliers-will-let-struggling-bakers-renegotiate-contracts-le-maire.html "French energy suppliers will let struggling bakers renegotiate contracts – Le Maire").

Those factors portend more difficulty in the months ahead and most of the lenders put aside more money for loans that could potentially sour.

We expect the macroeconomic environment to remain challenging as markets across [Europe and North America adapt to levels of inflation not experienced](https://www.financedigest.com/europe-experienced-second-warmest-winter-on-record.html "Europe experienced second-warmest winter on record") in decades,” said Santander’s Chair Ana Botin.

The performance of the five [European banks](https://www.financedigest.com/dollar-outshines-euro-sterling-amid-european-bank-jitters.html "Dollar outshines euro, sterling amid European bank jitters") compares favourably with more mixed results from U.S. rivals, where profits declined [largely because investment](https://www.financedigest.com/large-investment-success-for-basingstoke-cybersecurity-start-up.html "Large investment success for Basingstoke cybersecurity start-up") banks were battered by a slump in dealmaking.

[European banks](https://www.financedigest.com/ecbs-villeroy-rate-hike-signals-strong-confidence-in-european-banks.html "ECB’s Villeroy: rate hike signals strong confidence in European banks"), which are traditionally less reliant on deals for revenue than their U.S. competitors, have been cashing in on central [bank efforts to arrest runaway inflation](https://www.financedigest.com/bank-of-england-still-needs-to-see-the-job-through-on-inflation-pill.html "Bank of England still needs to ‘see the job through’ on inflation: Pill").

For years, banks bemoaned ultra loose monetary policy, but now higher [interest rates means](https://www.financedigest.com/interest-rates-are-cut-to-an-all-time-low-what-will-this-mean-for-small-businesses.html "Interest rates are cut to an all-time low. What will this mean for small businesses?") banks can start to benefit from the increased gap between what they charge borrowers and what they pay savers.

On Thursday, the European Central Bank (ECB) is set to raise the cost of borrowing further, offering an additional [lift to banks](https://www.financedigest.com/asian-stocks-rally-as-bank-jitters-calm-alibaba-lifts-mood.html "Asian stocks rally as bank jitters calm, Alibaba lifts mood").

Some [banks have huge increases](https://www.financedigest.com/banking-and-fintech-convergence-will-increase-reliance-on-it.html "Banking and Fintech Convergence will Increase Reliance on IT") in interest income,” said Jerome Legras of Axiom Alternative Investments.

“For the short term, it’s good,” he said, while cautioning about risks. In terms of what will happen for corporate [risk and mortgages](https://www.financedigest.com/aon-assists-freddie-mac-to-reach-5bn-risk-transfer-milestone-for-u-s-mortgage-credit-business.html "AON ASSISTS FREDDIE MAC TO REACH BN RISK TRANSFER MILESTONE FOR U.S. MORTGAGE CREDIT BUSINESS"), nobody really knows.

Deutsche Bank’s [finance chief](https://www.financedigest.com/bootmaker-dr-martens-warns-on-profit-as-finance-chief-walks.html "Bootmaker Dr Martens warns on profit as finance chief walks") James von Moltke told journalists that loan growth would “undoubtedly” slow “going into a weaker economic environment.

[Banks turn](https://www.financedigest.com/governments-and-central-banks-risk-inflation-bank-of-england-has-done-its-bit-now-the-politicians-turn.html "Governments and central banks risk inflation, Bank of England has done its bit, now the politicians’ turn") in fortunes is bitter sweet. It could attract the attention of political leaders, seeking to cover the costs of war and an [energy crisis](https://www.financedigest.com/europes-energy-crisis-and-the-nuclear-path-out.html "Europe’s energy crisis and the nuclear path out").

The Spanish parliament is debating a proposal that involves a 4.8% charge on [banks’ net interest](https://www.financedigest.com/ecb-raises-interest-rates-again-cuts-bank-subsidies.html "ECB raises interest rates again, cuts bank subsidies") income and net commissions.

A source familiar with the [British government’s plans said new finance minister Jeremy Hunt was reviewing the surcharge on bank](https://www.financedigest.com/crown-agents-bank-owner-explores-sale-of-british-payments-group-sources.html "Crown Agents Bank owner explores sale of British payments group –sources") profits and would confirm the level later this month.

[Shares of European](https://www.financedigest.com/european-shares-rise-as-us-inflation-data-signals-end-of-rate-hike-cycle.html "European shares rise as US inflation data signals end of rate-hike cycle") banks have lost around 25% from their peaks before Russia’s invasion of Ukraine, as investors fret about how a growing energy crisis, a weakening economy and soaring inflation will hurt their bottom lines.

The [war in Ukraine](https://www.financedigest.com/euro-zone-economy-sentiment-rises-in-dec-first-time-since-start-of-ukraine-war.html "Euro zone economy sentiment rises in Dec, first time since start of Ukraine war") upended business for banks, which scrambled to limit their ties to Russia and impose a series of sanctions packages.

UniCredit, which has failed so far to sever ties with its Russian unit, posted a profit for July-September of 1.71 [billion euros ($1.71 billion), well above analysts’ consensus forecast of 1.00 billion euros provided by the bank](https://www.financedigest.com/20-billion-in-bank-service-fees-are-you-overpaying.html " Billion in Bank Service Fees: Are You Overpaying?").

Standard Chartered’s third-quarter [profit surged 40% as higher](https://www.financedigest.com/polish-e-commerce-firm-allegro-eyes-higher-q1-profit.html "Polish e-commerce firm Allegro eyes higher Q1 profit") interest rates boosted the emerging markets-focused bank’s income, giving it ammunition to upgrade its revenue outlook despite a weakening global economy.

The [pace of economic recovery](https://www.financedigest.com/euro-zone-recovery-gathers-pace-allays-fears-of-recession-pmi.html "Euro zone recovery gathers pace, allays fears of recession-PMI") in many of our footprint markets is encouraging, notwithstanding increasing recessionary pressures in certain Western markets,” CEO Bill Winters said.

For Santander, higher loan loss provisions in [key markets like Brazil and the United States](https://www.financedigest.com/inflation-in-key-german-states-eases-for-second-month.html "Inflation in key German states eases for second month") overshadowed better than expected third-quarter earnings.

Deutsche [Bank and Barclays](https://www.financedigest.com/barclays-private-bank-opens-new-office-in-verbier-switzerland-for-2022-23-ski-season.html "Barclays Private Bank opens new office in Verbier, Switzerland for 2022/23 Ski Season") both benefited from increases in fixed-income trading, which outperformed some U.S. rivals.

Despite its ninth consecutive quarter of profit after years of losses, Germany’s largest lender [warned of an “increasingly challenging”](https://www.financedigest.com/deutsche-post-raises-annual-dividend-warns-of-challenging-2023.html "Deutsche Post raises annual dividend; warns of challenging 2023") environment and “intensified” cost pressures.

While benefiting from [higher interest rates](https://www.financedigest.com/powells-warning-on-higher-u-s-rates-pushes-dollar-to-3-mth-high.html "Powell’s warning on higher U.S. rates pushes dollar to 3-mth high"), banks also face the unwinding of a scheme that buoyed their profits for years.

Under that programme, 2.1 trillion euros of ultra-cheap loans were given by the ECB to banks, which in turn parked much of the cash [back with the central bank](https://www.financedigest.com/banking-turmoil-means-recession-fears-are-creeping-back.html "Banking turmoil means recession fears are creeping back"), earning interest.

That subsidy, which analysts estimate was [worth tens of billions](https://www.financedigest.com/why-a-quiet-revolution-in-the-cloud-is-worth-billions.html "Why A Quiet Revolution In The Cloud Is Worth Billions"), may now be unwound with an announcement as soon as Thursday.

[Deutsche Bank’s](https://www.financedigest.com/deutsche-bank-equity-bear-market-rally-will-stretch-into-2023-dollar-weaker.html "Deutsche Bank: Equity bear market rally will stretch into 2023, dollar weaker") von Moltke called discussion on the loan programme a “disappointment.

($1 = 0.8661 pounds)

($1 = 0.9975 euros)

(Additional reporting by Marta Orosz in Frankfurt, Valentina Za in Milan, Anshuman Daga in Singapore, Lawrence White and Iain Withers in London; Editing by Mark Potter)


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