Large European banks poised for further lending income growth in 2023

Net interest income growth at big European banks in 2022 is set to continue, with the benefits of higher interest rates on lending income yet to peak.

Net interest income (NII) — the difference between interest revenues and interest expenses — was a major driver of profits in 2022, and more is to come this year, analysts told S&P Global Market Intelligence. In a sample of 25 of the largest European banks, most reported year-over-year increases in fourth-quarter NII. Spain-based Banco Santander SA, which also runs significant operations in the UK and Latin America, booked the highest NII of €10.16 billion, according to Market Intelligence data.

Following on from the positives in the second half of 2022, the "full impact" will be seen in 2023, AlphaValue senior banking analyst David Grinsztajn said via email.

Trends in NII will depend on the evolution of central bank monetary policy. The ECB went ahead with a 50-basis-point hike in interest rates last week despite market volatility in the wake of the collapse of Silicon Valley Bank.

Variable effects

The boost in NII in 2023 is expected to vary depending on each bank's home country, analysts said. Net interest margins for banks in the UK are expected to peak soon, while deposit repricing is expected to accelerate in the second half in most southern European countries, said Olivia Perney, head of banks in developed markets in Europe at Fitch Ratings.

Spanish banks have a higher proportion of variable rate lending than many other Western European banks, Perney said. Margins at French retail banks, meanwhile, are suffering from faster deposit repricing, Perney said.

French banks have been contending with local regulations that mean that, as interest rates rise, they earn less from borrowers and pay more to depositors than many other banks. BNP Paribas SA's NII decreased year over year, although Société Générale SA and Groupe BPCE reported positive NII versus negative year-ago figures.

Sixteen of the 25 sampled banks saw their fourth-quarter 2022 net income rise, with HSBC Holdings PLC recording a jump to €4.65 billion from €1.69 billion. France-based Crédit Agricole Group and BNP Paribas, as well as Santander and Italy's UniCredit SpA, also reported net income above €2 billion.

The trouble with higher rates

While banks may be poised to benefit from rapidly increasing rates, there are risks. Wholesale-funded banks are set to book higher funding costs than deposit-funded retail banks, Perney said.

Aggressive monetary policy tightening was also a factor in the demise of Silicon Valley Bank, which was forced to take a large writedown on a bond portfolio to try to meet client withdrawals, leading to a loss of investor confidence and a run on the bank. Financial markets' reaction to this was among the factors that pushed Credit Suisse Group AG to the brink, leading ultimately to the Swiss bank being hastily taken over by UBS Group AG.

Higher rates have led to a decline in the value of banks' fair-valued financial assets, S&P Global Ratings noted in a report, saying there may be a significant, albeit broadly contained, risk of unrealized losses.

"SVB is a good example of the potential caveats of rapidly increasing rates," AlphaValue's Grinsztajn said. However, SVB faced "very specific" troubles and reflected excess risk-taking and mismanagement of assets and liabilities, Grinsztajn said.

All 25 sampled banks held double-digit common equity Tier 1 ratios — a key measure for capitalization and ability to withstand systemic shocks — at the end of 2022, according to Market Intelligence data.

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.

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