European Banks Staring Down Barrel of ECB Rate Cut Seek Relief

(Bloomberg) --

After five years of negative interest rates, Europe’s lenders are grasping for straws.

Top bankers used the release of dire earnings in recent weeks to lobby the European Central Bank to soften the blow of another potential interest rate cut. From Deutsche Bank AG to UniCredit SpA, executives say expectations for even lower rates have already made it harder to meet their goals, at a time when international trade disputes have clients sitting on the sidelines.

“It’s a cry for help because rates are really hurting banks, hitting their share prices and even undermining whole business models,” said Michael Huenseler, who helps manage about 24 billion euros ($27 billion) including European bank bonds at Assenagon Asset Management in Munich. “European bankers never dreamed they’d be living with low rates for so long.”

High on the wish-list for lenders is an exemption from at least some of the charges for holding deposits at the central bank, known as tiering. The ECB, which introduced negative rates in 2014, charges banks more than 7 billion euros a year to deposit cash. That’s hitting lenders from Germany, France and the Netherlands in particular, because they account for the biggest share of excess liquidity held at the region’s central banks.

Germany’s Commerzbank AG alone would face a 50 million-euro hit to lending income if the ECB cut its deposit rate to minus 0.5% from minus 0.4%, as many economists predict. So far this year, the bank has compensated for the cost of negative rates by lending more, charging corporate clients for deposits and thanks to lower funding costs, according to finance chief Stephan Engels.

His counterpart at Deutsche Bank, James von Moltke, says tiering could “be better than neutral to us in terms of the revenue impact.” Both Deutsche Bank and Commerzbank have struggled with low profitability for years and have been unable to stage successful turnarounds.

The ECB said in July that tiering is an option it’s looking at. It has been adopted in other countries, but it’s unclear how or whether the ECB would apply it. It’s also not clear whether banks, many of which have started to pass on some of the cost of holding excess cash to their institutional clients, could keep any savings from tiering or would be required to share them.

“My simple -- but it may be too simple -- assumption would be that the ECB’s interest would be to strengthen the profitability and capital base of the banks,” Engels said on a recent call. In that case, banks shouldn’t be allowed to pass the savings on, he said.

Credit Agricole SA, which bills corporate and institutional customers at its asset servicing unit for ECB deposit charges, thinks it would probably have to share the benefits of tiering, according to finance chief Jerome Grivet. “So I don’t expect a significant improvement” in profitability as a consequence, he told analysts last week.

“It’s possible we get some benefit through tiering, but I think that’s unlikely to offset the overall impact of lower rates on us,” Clifford Abrahams, the finance chief of Dutch lender ABN Amro Bank NV, said in an Aug. 7 interview with Bloomberg TV. “So we need to be operating the business to succeed in a low-rate environment.”

Whether banks can hang on to the savings is largely up to the ECB. Tiering would also help the ECB keep other benchmark rates lower for longer, which in turn eats into lending margins at banks. That’s why for some, it’s not much more than a sideshow.

“We have to move away from the policy that is currently being anticipated,” Ralph Hamers, who runs Dutch lender ING Groep NV, told analysts last week. “Banks need a positive yield curve. Banks need an interest rate environment that is healthy, that is resembling a healthy economy.”

To contact the reporters on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net;Steven Arons in Frankfurt at sarons@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Christian Baumgaertel

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