European banks inch towards high-rate cliff edge
XLF•Shares in Europe’s 20 largest lenders by assets have fallen 7% since early August as bond yields rose. The article argues that higher rates pose risks to banks but that the risks remain manageable.
1. Bank shares fall
Shares in Europe’s 20 largest lenders by assets have dropped 7% since early August, while the STOXX Europe 600 fell 2%. French lenders BNP Paribas, Crédit Agricole and Société Générale lost an average of 20%; Lloyds Banking Group, NatWest and Barclays fell 11% on average, and UniCredit and Intesa Sanpaolo dropped 8%.
2. Higher-rate risks
Higher borrowing costs can weaken credit demand, encourage depositors to seek better yields, increase loan defaults and cause losses on government bond holdings. Euro zone loan growth slowed to zero at the end of 2023, when the European Central Bank raised its deposit rate by 2 percentage points.
3. Risks seen as manageable
Market prices tracked by LSEG imply ECB rates will end 2027 at 3.25%, 0.75 percentage points above current levels, and the Bank of England will stop at 4.75%, up 1 percentage point. Deutsche Bank says a half-percentage-point rise in unemployment across its key markets would increase provisions against performing loans by €50 million, compared with expected pretax profit of about €10 billion this year. JPMorgan analysts estimate a 100-basis-point widening in the French-German debt spread would reduce French banks’ common equity Tier 1 ratio by 4 basis points. The sector’s average valuation multiple has fallen by a tenth since early August to less than 1.6 times forward tangible book value.
