Big Dutch and Belgian banks' dependence on net interest income will likely delay their return to pre-pandemic operating profit levels, as loan growth remains subdued and deposit volumes surge in the persistently low interest rate environment, according to analysts.
Net interest income, or NII, makes up the majority of Benelux banks' operating income, rendering them vulnerable to the impact of low rates and limiting their options to offset NII erosion. With pressure on NII, the pace of the banks' rebound will largely depend on how quickly the economy recovers, and the outlook remains uncertain for most of the lenders at least until the end of 2021, according to analysts at Fitch Ratings and Rabobank Research.
Short-term earnings under pressure
"Banks will have to target loan volume growth and cost efficiency to improve profitability," Paul van der Westhuizen, senior analyst at Rabobank Research, told S&P Global Market Intelligence. But loan demand will depend on how quickly the economy recovers, and cost reduction will need to be balanced with "vital" digital investment and the maintenance of revenue streams, he said.
Margins are expected to remain under pressure in 2021, although some loan loss provision releases later this year could provide a one-off boost to profitability, he said in a written comment.
According to Fitch Ratings, the revenue drag from lower net interest income, together with higher-than-normal provisions, is set to impact operating profits at least until 2022. The agency estimates that the operating profit-to-risk-weighted assets ratio at big Benelux banks in 2022 will be between 1.6% and 1.9%, lower than 2.1% in 2019. Fitch's short- to medium-term outlook on the banks' earnings is negative.
"Meaningful loan loss provision releases will depend on the improvement of the macroeconomic forecasts and the degree of certainty the management will put on them," Andreea Playoust, director, banks - EMEA at Fitch Ratings, told S&P Global Market Intelligence.
Banks bearish on NII
In 2020, NII at Netherlands-based ING Groep NV, Rabobank, de Volksbank NV and Belgium's KBC Group NV fell by 3% year over year, while Dutch lender ABN Amro Bank NV booked a decline of 9%. Belgium-based Belfius Bank SA posted an increase, which it attributed mainly to increasing commercial loan volumes at higher margins on stock, relief provided by the deposit rate tiering of the ECB and positive effects coming from the central bank's third targeted longer-term refinancing operations program, or TLTRO III.
Of the banks reporting earnings on a quarterly basis, ING posted a slight year-over-year NII increase of 0.3% for the first quarter of 2021, while ABN Amro and KBC both saw drops of 11%.
Despite the improvement, ING CEO Steven van Rijswijk said the continued pressure on interest income is a concern. With both medium- and long-term yield curves still negative, and with lower-for-longer interest rates expected in Europe, banks that are largely dependent on NII will continue to be affected, he said during a first-quarter earnings call in May.
"We need to adjust our business model to cater for that," he said.
At ABN Amro's earnings presentation, CEO Robert Swaak said deposit margin pressure dented first-quarter NII by €28 million, and projected a continued NII drag of around €20 million per quarter for the rest of the year.
Dutch deposit volumes surged during the pandemic while loan volume growth slackened, narrowing the gap between the two in 2020.
KBC Group CEO Johan Thijs said 2021 net interest income should be close to €4.3 billion in 2021, lower than the €4.47 billion booked in 2020. Although he did not provide an exact figure for 2021 domestic NII, KBC CFO Luc Popelier said loan growth in Belgium would only partly offset the negative impact of increasing deposit volumes.
Belgian deposit volumes surpassed loan volumes as a result of the savings surge amid the pandemic in 2020.
Insufficient mitigation
Despite the banks' efforts to reprice deposits, the relief provided by the ECB tiering and NII benefits from the TLTRO III program, they still face headwinds, according to Fitch Ratings.
"Benelux banks try to be disciplined in pricing their new loan production. Having said that, banks also need to preserve market shares which sometimes may limit the scope of their repricing strategy," Playoust said.
"Charging negative interest rates on deposits is yet to provide meaningful support for NII, but the benefit may become more material if minimum deposit balance thresholds are lowered," Fitch Ratings said in its analysis.
But Playoust said that for Dutch banks, there is limited scope to further decrease the threshold for charging negative rates on retail deposits below the level of €100,000. The lower threshold will take effect at ING, Rabobank and de Volksbank from July 1, while ABN Amro will charge negative rates on deposits above €150,000. Currently, the threshold is €250,000 at ING, Rabobank and de Volksbank and €500,000 at ABN Amro.
No Belgian banks except ING Belgium have imposed negative rate charges on retail deposits so far. KBC has said it charges a limited number of its corporate and SME clients. A key reason for the lack of retail deposit charges is the high share of regulated savings accounts at Belgian banks, which stood at 60% of household deposits at the end of 2020, according to Fitch.