Which factors have boosted European banking profits?

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In 2023, many European banks posted excellent earnings with profits often reaching levels last seen in 2007 and sometimes hitting all-time highs. In its latest quarterly Risk Dashboard, the European Banking Authority (EBA) clearly identifies the various earnings growth drivers contributing to the rise in return on equity (RoE) for European banks between the first quarter of 2023 (10.4%) and that of 2024 (10.6%).


Unsurprisingly, net interest income, which is directly linked to interest rate levels, contributed positively over the period. Banks that lend at fixed rates are benefiting from the gradual replacement of old low-rate mortgages with new higher-rate loans. In countries where variable-rate mortgages are common, banks rapidly benefitted from rising rates.

Yet this positive interest rate effect contributed less to RoE than the fall in banks’ contributions to the Deposit Guarantee Scheme (DGS) and the Single Resolution Fund (SRF). These prudential funds have now reached their respective targets of €55 billion for the DGS and €80 billion for the SRF following several years of contributions from Europe’s financial institutions. Banks have increased their RoE by 1.3% as a result of these contributions ending in the first quarter of 2024. The end of this regulatory effort means that banks’ cost bases will now sit at significantly lower levels than previously.

Noteworthy is the negative contribution from the “Others (incl. tax)” category, which was mainly due to the introduction of a new Spanish windfall tax on banking profits. In the first quarter of 2024, Spanish banks recorded the tax due for entire fiscal year. From the next quarter onwards, this accounting impact will have disappeared, and the RoE of European banks should mechanically rise to around 12%, assuming all other factors remain constant.


Written on July 5 , 2024. This is not an investment advice. Opinions subject to change.

See also: https://latribune.lazardfreresgestion.fr/en/americans-have-never-flown-so-much/

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