European Banks Set to Report Higher Profits Amid Rising Interest Rates

European banks are preparing to announce increased profits as a result of higher interest rates in their third-quarter earnings reports. Most of the continent's major lenders are expected to demonstrate a further rise in net interest income, the difference between what they pay on deposits and what they earn from loans. This increase in net interest income has been a key driver of profits for banks on both sides of the Atlantic for over a year, helping some banks offset the impact of a relatively low volume of mergers and acquisitions.

The European Central Bank (ECB) has initiated a series of rate hikes following the US Federal Reserve and the Bank of England. Analysts anticipate that European banks will continue to benefit from this tightening cycle, as the ECB raised rates to a record 4% in an attempt to combat inflation.

Barclays analyst Paola Sabbione expects Italian banks to report a significant increase in net interest income for the third quarter, potentially paving the way for distribution surprises in the fourth quarter.

UniCredit, Italy's second-largest bank, will report its results on Thursday, while Intesa Sanpaolo, the country's largest lender, is set to release earnings on November 3. Spanish banks, including Santander, are also expected to show further gains in net interest income.

A rating agency analysis by S&P suggests that Spanish and Italian banks have passed on a smaller portion of the benefits of higher rates, known as deposit beta, to depositors compared to other banks, including those in the UK.

The strong performance of European banks has propelled the Stoxx Europe 600 Banks index up by 11% this year, surpassing the 3% gain in the broader Europe Stoxx 600.

However, with most economists predicting that the ECB's recent rate hike will be its last, European bank executives may face questions from investors and analysts about their long-term profit strategies.

In contrast, UK banks, which were among the first to benefit from rising interest rates as the Bank of England initiated monetary policy tightening in December 2021, are expected to have experienced a more challenging third quarter. Factors contributing to this difficulty for UK banks include deposit migration, spread compression, and low mortgage volumes.

Unlike European lenders, shares in UK banks have struggled this year. Shares in Barclays, which reports on Tuesday, have declined by 9%, and Lloyds Banking Group stock has fallen by 8%. Lloyds is scheduled to report its results on Wednesday, and shares in state-backed NatWest, which reports earnings on Friday, have fallen by 18% this year.

The contrasting performance of European and UK banks underscores the complexities and opportunities that financial institutions face in a shifting interest rate environment.

By fLEXI tEAM