Europe’s largest banks generated huge profits on the back of rising interest rates in the third quarter, raising the prospect of governments targeting the lenders with windfall taxes.
Deutsche Bank reported one of its strongest quarterly performances since before the financial crisis on Wednesday morning, while Barclays, Santander, UniCredit, Standard Chartered, HSBC and UBS all beat analysts’ estimates.
Higher interest rates — which typically boost bank earnings — were the main reason, while strong performance in fixed-income trading also helped lenders with large investment banks, such as Deutsche Bank and Barclays.
Banks generate large profits based on the difference between the interest they charge on loans — which rise in line with central bank interest rates — and the deposits they pay to customers, which lag behind increases in interest rates.
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The profits are an attractive target for cash-strapped governments. In July, Spain became the first western European country to propose a windfall tax on bank earnings, following in the footsteps of Hungary, which has already introduced one. Spain’s plans set it on a potential collision course with the European Central Bank.
The UK’s new chancellor, Jeremy Hunt, is also preparing to maintain a bank levy in a set of tax rises designed to undo the disastrous impact of a short-lived tax-cutting Budget unveiled by his predecessor.
Bank of England interest rates have risen to 2.25 per cent from 0.1 per cent last year, while bank analysts expect the European Central Bank to raise interest rates from 0.75 per cent to 2.5 per cent next year.
Barclays reported a pretax profit of £1.97 billion (€2.3 billion) for the three months to the end of September, up 6 per cent from a year ago and beating analysts’ expectations of £1.81 billion.
Deutsche Bank’s pretax profit more than doubled to €1.6 billion in the third quarter, the highest for the period since 2006 and above the average analyst expectation of €1.3 billion. All four divisions of the bank posted higher revenue, with its investment bank unit gaining market share in fixed-income trading.
Santander, the Eurozone’s biggest lender, reported an 11 per cent year-on-year increase in net income to €2.42 billion in the third quarter, beating expectations but marking a slowdown from growth in the previous three months.
The Spanish bank increased its reserves for potential loan losses by 24 per cent to €2.76 billion as inflation and higher interest rates put more businesses and consumers under stress. But while default rates increased in the US and Brazil, they fell in the UK, Spain and Mexico.
Milan-based UniCredit said net profit this year would exceed €4.8 billion, higher than its previous guidance, due to rising interest rates and better than expected third-quarter earnings. Italy’s second-largest bank reported a record €1.71 billion profit in the three months ending in September, higher than the €1 billion analysts had forecast thanks to lower than expected loan losses.
Standard Chartered’s third-quarter profits came in higher than expected due to rising interest rates, with Singapore’s contribution to the bank’s bottom line surpassing that of Hong Kong, which has struggled to recover from pandemic restrictions. The bank reported pretax profit of $1.4 billion in the third quarter, up 40 per cent from a year earlier and beating analyst estimates of $1.1 billion.
The outperformance from StanChart follows rival lender HSBC posting bumper third-quarter profits on Tuesday and comes despite recent tumult in its home market with wild swings in UK government bonds. — Copyright The Financial Times Limited 2022
