Banks in UK and Italy to benefit the most from rising interest rates, while Swiss and Swedish banks could suffer, says S&P Global report

S&P Global, a credit rating firm, has conducted a study revealing that increasing interest rates across Europe will impact European banks differently. The study analyzed 85 of Europe’s largest banks, with a total of €31tn ($33.28tn) of assets, and found that British and Italian banks are expected to benefit the most, with an average weighted NII impact of over 25%. Banks in Spain, Germany, Denmark, and Austria will see an impact of between 10% and 16%. Meanwhile, French and Dutch banks will see an impact of less than 10%, while Swiss and Swedish banks could experience a decline of 29% and 5%, respectively, due to stricter capital rules. However, the actual impact on banks’ NII will depend on two key factors: the speed of policy rate rises and the strength of net lending amid a weakening economic backdrop.

S&P also highlighted that the current high inflationary environment will result in rising operational and credit costs for banks. The wages for bankers have already begun to rise, and banks’ non-interest expenses have increased by 7.2% in the first quarter of this year in the United States, where inflation started to increase before Europe. The report further revealed that rising interest rates could put pressure on borrowers with weaker finances, leading to more loan defaults. The European Central Bank (ECB) is phasing out its ultra-cheap funding offerings, known as TLTROs, which could impact banks’ profits, representing between 59-126 basis points of return on equity, leading to an additional interest cost of €10bn to €20bn for the largest eurozone banks.

Despite these challenges, S&P predicts that European banks will generally see a rise in profits in 2022 and 2023, although many will still barely cover their cost of capital. The report mentioned that as inflation is expected to ease next year, and unemployment is predicted to rise only modestly, S&P believes that rising interest rates will be a net benefit for most European banks under its base case. However, the benefit to NII could vary significantly.

In conclusion, while European banks are expected to see varying impacts from the increasing interest rates across Europe, the actual impact on banks’ NII will depend on the speed of policy rate rises and the strength of net lending amid a weakening economic backdrop. The current high inflationary environment will also result in rising operational and credit costs for banks. Despite these challenges, S&P predicts that European banks will generally see a rise in profits in 2022 and 2023. However, the benefit to NII could vary significantly, with some banks experiencing declines due to stricter capital rules.