European banks see light at end of low-rates tunnel
European banks see light at end of low-rates tunnel
Low rates, money printing and a penalty charge for hoarding cash have been at the heart of attempts to reinvigorate the 19-country euro zone economy in the wake of the 2008-09 debt crisis.
But the policy has been politically divisive, prompting fierce criticism from famously thrifty Germans as the returns on savings in Europe’s biggest economy dwindled to nothing.
It also imposed a heavy cost on still fragile banks, turning deposits into a hot potato that many would rather avoid so as not to pay charges to their central bank for storing them.
Last year marked a new low, according to a survey by Reuters of 20 large European banks conducted in mid-February.
While seven in that group saw net interest income fall during 2015, that number increased to 12 in 2016, with the average dip more than 7 percent. That was steeper than the roughly 5 percent slip on average in 2015.
Such income is the difference between interest charged on, say, a loan and the cost of holding a deposit. It is a bellwether of earning power, closely watched by investors, and its decline bodes ill for the sector.
Many executives are now pinning their hopes on a change in direction for central banks given that rate hikes appear to be on the cards in the US this year — and ultimately a paring back of easy-money policies in Europe.
“It is usually the US that leads the pack,” said Charles Goodhart of the London School of Economics (LSE), a former member of the Bank of England’s (BoE) Monetary Policy Committee.
“If (US President Donald) Trump does manage to get an expansionary fiscal policy, there will be increases in interest rates,” he said, adding that the effect would also be felt in Europe.
Trump has pledged to stimulate growth in the world’s largest and most influential economy through a combination of heavy infrastructure investment and deep corporate tax cuts.
In December, the US Federal Reserve raised interest rates and signaled a faster pace of increases in 2017.
For European banks, the shift in rates cannot happen soon enough.
Lars Machenil, chief financial officer of France’s BNP Paribas, one of Europe’s biggest lenders, said the difference could be hundreds of millions of euros of extra income.
“The lowering of interest rates has had a negative effect on the top line. If that would be reversed, we would see something similar back ... but it will take time,” he said.
In 2016, Switzerland’s Credit Suisse saw interest income dip by about 19 percent, while at Germany’s Commerzbank and Deutsche Bank, it fell by about 13 and 8 percent respectively, the Reuters survey found.
UniCredit’s interest income dipped by about 6 percent. Spain’s Bankia saw a drop of about one fifth.
While successful in helping a brittle euro zone economy gradually revive from the debt crunch in the short term, zero or negative rates have, in the eyes of critics, struck at a central tenet of banking — lending on the back of deposits — and turned the principle of saving for retirement on its head.
There are signs that the struggle of frustrated lenders is being noticed in Frankfurt, seat of the European Central Bank (ECB).
Yves Mersch, a member of the ECB’s executive board, the nucleus of euro zone policy-setting, recently said it needed to take interest rate cuts off the table, which would mark a retreat from its policy of cheap money.
“How much longer can we continue to talk about ‘even lower rates’ as being a monetary policy option?” Mersch said.
Penalyzing banks for storing money makes holding deposits, traditionally the bedrock of any lender, more expensive, and this prompts some to steer savers toward fund products for which a fee can be charged.
UBS CEO Sergio Ermotti has warned that the world’s biggest wealth manager could pass on the cost to depositors if sub-zero rates persist. So far, only one Swiss bank, Alternative Bank Switzerland, has imposed such charges.
Another way around the problem is keeping deposits low and bolstering lending.
Sweden has generally done better in this respect than most. That is something that Barclays analyst Mike Harrison attributes to a lower average level of deposits, which cost a bank money if it cannot lend and must pay a penalty for storing them at the country’s central bank.
The ECB imposes a so-called negative rate equivalent to €4 annually on each €1,000 that lenders deposit with the central bank. Banks in Sweden and Switzerland, outside the neighboring euro zone, pay a similar charge.
“Swedish banks have managed best to avoid the impact of zero rates due to the fact that they held fewer deposits,” said Harrison. “That made it easier to earn a healthy margin on their loans.”
Swedbank, for instance, boosted its lending last year by 7 percent to about 1.5 trillion crowns, while its deposits from the public were roughly half that and rose more slowly.
The Netherlands’ ING and Sweden’s Swedbank, where lending outpaced the inflow of deposits, posted a roughly 9 and 3 percent increase respectively in such interest income, the Reuters study found.
Germany’s Commerzbank tried a broadly similar strategy, cutting deposits from corporate customers by about €22 billion. But the cost of penalty or negative rates still squeezed its income by more than €200 million in 2016 — roughly a third less than its net profit for the full year.
Michael Heise, chief economist with giant German insurer Allianz and a long-standing critic of cheap-money policies, believes relief is at hand.
“There is finally hope of a change in interest rates,” he said. “The tone among policymakers has changed. The evidence is clear. I think we could see rates rise next year.”
Mozambique’s gas-fueled future threatened by militants
- An unprecedented wave of militant attacks in northern Mozambique has raised fears the country will fail to fully cash in on a gas bonanza
- Since October, more than 30 people have been killed in brazen assaults on unarmed villagers
MAPUTO: An unprecedented wave of militant attacks in northern Mozambique has raised fears the country will fail to fully cash in on a gas bonanza.
After 180 trillion cubic feet (5.1 trillion cubic meters) of natural gas were discovered off the country’s northeastern shore, Mozambique entertained dreams of following Qatar down the path toward wealth. The government even predicted that by 2035, the country’s GDP per head could increase sevenfold.
But the southeast African country’s golden vision has been thrown into doubt by an explosion of bloodthirsty assaults by a shadowy militant group in the region where the industry plans to base its hub.
Since October, more than 30 people have been killed in brazen assaults on unarmed villagers.
Security forces have rushed reinforcements to be area yet seem powerless to stem the attacks. Terrorized, many civilians have fled their homes and a cloud hangs over the great expansion plans.
US oil and gas giant Anadarko, the largest exploration company in the region, has invested $4 billion (3.4 billion euros) so far — it plans to put in $20 billion over the lifetime of the gasfields.
But following a US embassy alert on June 8 that warned of an imminent attack on the regional gas hub Palma, Anadarko temporary suspended some activities and moved affected workers and contractors to a secure site.
Canada’s Wentworth Resources has already suffered delays to its projects as a result of the insecurity, forcing it to seek a year-long extension for its initial exploration.
In its successful application to the authorities, Wentworth said the attacks had “prevented safe access to the area for Wentworth staff and contractors.”
There have been more than 10 attacks on villages since October, featuring beheadings and arson. None has targeted gas operations.
“Due to the attacks, we took additional measures to protect not only the oil and gas companies operating in that area, but also to protect the communities,” said Joaquim Sive, the police commander in Cabo Delgado.
Eric Morier-Genoud, a researcher at Queen’s University Belfast, said any attack against the gas “majors” would be an “escalation from which the militants would come out the losers.”
“At this point... based on the information we have, we classify the attacks as an insignificant risk to the economy,” Rogerio Zandamela, the governor of Mozambique’s central bank, told AFP.
In contrast to this, the central bank did consider a spate of attacks carried out by a militia loyal to the main opposition Renamo party in the country’s center in 2015 and 2016 as an economic risk.
“There was much more clarity about the conflict in central Mozambique... We cannot equate the north with the south,” Zandamela said. “The information available on the conflict in Cabo Delgado is very limited.”
Police have stepped up security around gas projects — particularly those close to areas that have come under attack, national police spokesman Inacio Dina told AFP.
An official at Anadarko, who declined to be named, said “There have been no threats specific to our project. However, it is a cause for concern, and therefore, as operations continue, we have undertaken appropriate measures.”
The company has a gas operations camp in a forest on the Afungi Peninsula.
Police and army units have established a command post in the forest following the attacks.
But a source at Anadarko told AFP that the firm has also stepped up its own security efforts, increasing its private protection force by two-thirds — a move that will have an impact on costs.
Despite such problems, foreign investors for now still have a big appetite for a share of Mozambique’s gas treasures.
Japan’s Tokyo Gas and Britain’s Centrica inked supply deals with Anadarko on June 15 — just a day after a machete attack on the village of Ibu.
Even so, experts say the instability in the northeast could still prove costly. It could cut into the dividend that Mozambique expects from the huge find.
“(The gas projects) are at risk in their early stages, as attacks can adversely affect logistics. Materials must reach Palma by land,” said Maputo-based political science researcher Joao Pereira.
“The insurgency is most likely to delay rather than derail development of the sector,” said Ed Hobey-Hamsher, an analyst at global risk consultancy Verisk Maplecroft.
“Attacks will certainly make the investment more expensive because of security needs reducing revenues for the state.”