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How do European banks have higher profits now?

The European Central Bank opened one cycle of interest rate increases while concurrently closing another. Because of the low profitability of European banks, which have "suffered" from the ECB's zero and negative interest rates for more than a decade.

Hence, the conclusion of this cycle ushers in a new one, with European bank earnings leaving behind the "moderation" of prior years. In spite of the fact that banks' profits are rising, their capital adequacy is improving, and they are ready to distribute dividends to their shareholders, there are still those who may feel "thrown" And the depositors are as follows.

As a result of the ECB's interest rate hikes, borrowing costs increased, which raised banks' interest revenue and was the primary driver of their profitability.

Indicatively, the index of European banks since the beginning of the current year excluding today's meeting has increased by a not insignificant 18.65%, while the profits of the financial services industry have increased by 12.55 %.

Despite rising interest rates and earnings, banks do not appear inclined to shift profits or a large portion of revenues to deposits. Hence, while debtors are considerably burdened, deposit interest rates remain extremely low, making them even unprofitable.

Even if bank management may have proclaimed an increase in deposit rates or introduced new term deposit programs, the profit-sharing sloppiness again heavily favors the banks.

The banks themselves check the scenario without hesitation. Yesterday, during a conference call with investors following the presentation of the German bank's fourth-quarter results, the chief financial officer of Commerzbank, Bettina Orlop, stated, "There is no substantial pass-through of profits from interest rates to customers."

Even though Commerzbank will increase deposit rates, as other European banks plan to do, the profit rate known as deposit beta (the percentage change in the deposit rate divided by the percentage change in the funds rate) will remain below the predicted 30% average for 2023.

The German bank is neither the first nor the only to make such declarations; UniCredit, Santander, Intesa Sanpaolo, and Deutsche Bank all share the same viewpoint.

The depositors, on their part, are obviously upset, and there have been numerous protests. The banks' response has been to begin increasing interest rates, particularly on term deposits.

After a decade of zero or negative interest rates during which banks did not pass on the costs to their consumers, they argue that it is time for a better and more profitable period for them.



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