European lenders are bracing for deeper cost cuts and consolidation after the European Central Bank extended a punishing five-year stretch of negative interest rates.
The region’s banks were left disappointed by Mario Draghi’s last major act as ECB president, in which he last week cut its key deposit rate to minus 0.5 per cent, while also unveiling a new tiering system designed to shield a portion of the deposits lenders keep at the ECB from negative rates.
However, the relief provided by tiering will barely offset the lost earnings from lower base rates, according to analysts and executives interviewed by the Financial Times, piling pressure on a sector already struggling to generate acceptable returns. The ECB is expected to cut its deposit rate again by next year, which could lower even further the Euribor rate on which many loans are priced.
“Deposit tiers . . . [are] a drop in the ocean,” said Morgan Stanley analyst Magdalena Stoklosa. “Profitability uplifts could be minimal for most banks . . . as sensitivity to Euribor is multiple times greater versus savings on cash reserves parked at the ECB.” [...]
“Deposit tiering doesn’t help us even nearly enough,” said a top executive at a major German lender. “The ECB’s decisions make it impossible to generate a return of 10 per cent or more. In this environment we’ll do well to get to 7 [per cent].” [...]
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