 Harriett Baldwin, chair of the UK's parliamentary Treasury Committee, told bank CEOs July 6 that they needed to "up their game" regarding deposit rates. Source: Luke Dray/Getty Images |
European bank stocks face pressure from increasing government demands for lenders to raise interest rates on deposits.
Banks in the UK, Spain and Italy are among those facing calls from politicians to offer more generous rates to savers as many customers struggle with a surge in living costs due to persistent inflation and higher borrowing costs. Banks across Europe are enjoying big boosts to lending income and profits from higher central bank rates, which have been helping push up share prices since November 2022.
Aggregate interest income at Europe's largest banks more than doubled year over year to €134 billion in the first quarter of 2023, according to S&P Global Market Intelligence data. Meanwhile, aggregate interest expenses, which include interest paid to depositors, rose by €55 billion, €15 billion less than the increase in aggregate interest income.
"Political interference in a deposit pricing context is very unwelcome on the part of the investment community," John Cronin, bank equity analyst at Irish stockbroker Goodbody, told Market Intelligence. "It's another headache for investors who have been scratching their heads around investing in European banks for the last 12 or 13 years."
The portion of short-term central bank rates passed on to depositors, known as the deposit beta, by eurozone banks showed a moderate increase in May, according to an analysis of European Central Bank data by investment bank Jefferies. The euro area deposit beta reached 13% in May, up from 12% in April.
The Spanish and Portuguese banking sectors recorded the lowest deposit betas for the first five months of the year at just 5%, while Italy posted an 8% increase, the data showed.
"Mild growth in deposit remuneration is positive for banks' [second-quarter] top line, especially in Southern Europe, where deposit beta remains particularly low," Jefferies said in the July 5 report.
The tepid increase in deposit costs for European banks has allowed net interest margins to swell as higher rates have been passed onto borrowers. The median net interest margin among a selection of Europe's largest banks rose to 1.64% in the first quarter of 2023 from 1.15% a year earlier, Market Intelligence data shows.
The slow pass-through of higher rates to depositors in Spain prompted its government to instruct the Spanish National Markets and Competition Commission on June 29 to determine why banks are failing to remunerate savers more generously and recommend any legislative changes to ensure they do so. This came after the antitrust authority admitted that it lacked the necessary tools to investigate anticompetitive collusion or agreement between banks when setting deposit rates.
"The Spanish government is very angry with the banks because they think depositors should be paid more," Javier Santacruz, an economics lecturer at Madrid's Instituto de Estudios Bursátiles, told Market Intelligence. "But the government doesn't have the proper tools to force banks to do that."
The Spanish government already hit the country's banks with a windfall tax last year on the additional revenues generated by higher rates. The tax will be in place for two years and aims to generate €1.5 billion per year from 2022 and 2023 earnings. Some of Spain's banks are challenging the legality of the tax before Spanish courts.
State ownership
Banks that are still partly owned by the state may feel more pressure to raise deposit rates depending on the political backdrop, said Goodbody's Cronin. Governments continue to own sizeable stakes in several large European banks following emergency bailouts during the 2008 global financial crisis. The UK's NatWest Group PLC, Spain's CaixaBank SA, and the Netherlands' ABN Amro Bank NV are among those in which the state is the biggest shareholder.
"From an executive and management perspective, they're probably very aware of the political dynamic, and therefore it influences their behavior," said Cronin. "It's almost like it can act as an invisible hand rather than necessarily inappropriate political interference."
Still, most banks in Europe have little incentive to increase rates on deposits as loan demand weakens and liquidity remains strong, said Johann Scholtz, bank equity analyst at Morningstar.
"The kind of demand-supply fundamentals at the moment do not necessitate banks to increase competition for deposits," said Scholtz. "Once the demand for lending picks up then you can potentially see, over time, competition for deposits increasing."
'Measly'
In the UK, the Financial Conduct Authority urged lenders July 6 to "accelerate" recent increases in savings rates after a meeting with several UK bank CEOs. The banks have been accused of profiteering from the rapid rise in rates.
The UK regulator's action followed a parliamentary committee investigation in June into why many leading banks were failing to pass on higher rates to some savings accounts. The head of the committee, Member of Parliament Harriett Baldwin, said banks needed to "up their game" and put an end to the "measly" savings rates.
"Anytime strong returns start to come through, anytime there is a period of success or a positive outcome for the sector, you get this kind of reaction," said Cronin. "No wonder some investors don't want to invest in banks; no wonder banks trade at a discount to book value, despite their return profiles."
European banks continue to trade on average below their book value after a decade or more of underperformance compared to their US peers. Investor sentiment toward European banks has remained lukewarm as interest rates have risen in the past year. The average price-to-book value of Europe's largest banks stood at 0.86x as of July 7, the same as it was at the end of 2021, Market Intelligence data show.
Meanwhile, the average price-to-book value of the largest US banks, which has been severely dented by the collapse of several lenders since March, stood at 1.12x on July 7, the data shows.
The gap between European and US bank stocks is unlikely to be bridged any time soon if the current level of political interference in the sector persists, Cronin said.
"This pressure to raise deposit prices just reinforces the arguments among a lot of investors that they don't want to go near banks," Cronin said.