Lending income at many European banks is poised to climb in 2023 and rise further in 2024, amid tightening monetary policy.

In a sample of 25 of the continent's largest banks, 23 are set to record year-over-year increases in net interest income — the difference between interest revenues and interest expenses — in 2023, according to analyst consensus estimates compiled by S&P Global Market Intelligence. Spain-based Banco Santander SA is poised to book the highest level of net interest income at €41.51 billion.

Fifteen of the banks are expected to record even higher NII in 2024, including Santander, fellow Spanish bank Banco Bilbao Vizcaya Argentaria SA, UK-based HSBC Holdings PLC, Dutch bank ING Groep NV and Germany's Deutsche Bank AG.

As central banks began hiking rates last year to tame inflation, banks were able to earn more on loans and pass on rate benefits to depositors more slowly. The European Central Bank has increased its key deposit rate 375 basis points since July 2022; policymakers have indicated rate hikes will need to continue. Rate-setters at the Bank of England, which has raised rates 12 consecutive times, have made similar comments.

More NII growth to come

There is more room for NII growth since the ECB rate-hike cycle is probably not over and banks' stock of new loans are steadily increasing, Paul van der Westhuizen, a financials analyst covering European banks at Rabobank, told Market Intelligence.

Banks are set to enjoy the full benefit of higher interest rates throughout 2023 as the financial spread between assets and liabilities will remain open. That means many banks will generate record levels of NII, Roberto Frazzitta, global head of Bain & Co.'s banking practice, told Market Intelligence.

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Key is the deposit beta, which is a measure of how quickly banks pass on central bank interest rate hikes to deposits and thus face higher interest expense. It typically varies from country to country due to differences in financial behavior and deposit mixes, as well as the level of competition between traditional banks and new entrants, such as financial technology companies, Frazzitta said. Spanish and Italian banks historically have shown lower and slower-to-adjust deposit betas than countries like the UK and the Nordics.

Aside from Swiss banks UBS Group AG and Credit Suisse Group AG, which are undergoing a government-engineered merger, every bank in this analysis reported higher NII on a year-over-year basis in the first quarter, Santander booked the highest NII at €10.40 billion, followed by HSBC with €8.35 billion and Banco Bilbao Vizcaya Argentaria SA with €5.64 billion.

Italian banks Intesa Sanpaolo SpA and UniCredit SpA were also among the top 10 sampled banks with the highest NII in the quarter. The low deposit beta among Italian lenders was the primary reason they were able to raise their full-year NII guidance, said Angel de la Fuente, managing director and head of equities at Auerbach Grayson. NII is expected to peak between the second and third quarters, de la Fuente said.

Manageable provisions

The profitability boost from high NII likely will not be offset by loan loss provisions, according to analysts. European banks' cost of risk, a measure of loan loss provisions, has mostly returned to average levels, and a marked increase over the next three quarters is not expected, Van der Westhuizen said.

Though it booked the highest NII, Santander also booked the highest provisions among the sampled banks, followed by compatriot BBVA. Some banks booked provision writebacks in the quarter, Market Intelligence data showed.

Forecasts by authorities do not yet point out "immediate recessionary considerations," according to Bain's Frazzitta.

"We observe still low new flows of nonperforming positions and we do not expect a major shift of the economic scenario in 2023," Frazzitta added.

Banks in Russia and Ukraine, where government ownership means they are subject to different market dynamics than those in Western Europe, were excluded from this analysis.