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European banks' profits will continue to lag US and Canadian peers

Publication Date: 10 Dec 2018 - By Gaurav Sharma (Editor ReachX) By Gaurav Sharma (Editor ReachX)
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European banks will not benefit “as quickly” as their peers in other developed countries from the trend of globally rising interest rates, according to a new industry report. 

In a research note for its clients, rating agency Moody’s said the continent’s banks will continue to lag US and Canadian counterparts. In the US, banks' profitability will continue to outperform global peers, but the positive effect of rising interest rates will diminish.

“For European banks, the duration of loans is generally longer than for banks in other regions and will take more time to reprice at higher interest rates,” the agency said. 

The European Central Bank plans to end its quantitative easing program by the end of this year and will likely start to raise its ultra-low interest rates in the third quarter of 2019.

"The slower pace of rate rises and greater use of market funding will hold back profitability gains for banks in continental Europe," said Armen Dallakyan, Senior Analyst at Moody's.

Lending rates at banks in Canada and the UK will reprice faster at higher rates than for peers in other advanced economies, as their loans generally have shorter maturities, providing a more rapid boost to profits, Dallakyan added. 

Furthermore, the greater reliance on deposit-based funding in these two countries will keep banks' funding costs from rising as fast as loan yields, widening their net interest margins.

In the US, the stronger profitability of banks versus their global peers is being supported, among other things, by the rise in US rates that began in late 2015, Moody’s noted. 

At the largest banks, only around 20% of the increase in rates has been passed on to depositors in the form of higher rates. This has boosted the average net interest margin of the largest US regional banks. 

However, Moody's expects a higher percentage of future rate hikes by the Federal Reserve to be passed on to depositors as banks compete more aggressively to keep deposits, and as such the benefit to profitability will diminish over time.

 

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