ECB’s De Guindos Cautions That Rising Deposit Costs Will Impact Banks’ Lending Income

MADRID (Reuters) – The lending income of banks in the Euro zone is anticipated to face challenges due to a gradual rise in deposit remuneration, according to European Central Bank Vice-President Luis de Guindos.

Speaking at an event in Spain, de Guindos noted that while the rate of return on liabilities or savings typically lags behind that of assets, it will eventually align, and some of this adjustment is already occurring.

“This is one of the reasons the market is factoring in that the enhancement of financial margins seen recently may face headwinds going forward, and this improvement might not be as consistent as it was before,” he stated.

In general, banks in the Euro zone have benefited from increased interest rates, a trend particularly evident among Spanish banks, which predominantly operate as retail lenders.

These banks have enjoyed improved returns on mortgage loans, which are largely tied to floating rates, while maintaining lower rates for savers. As of September, Spanish banks were offering an average return of 2.33% on one-year household deposits, compared to 3.09% across the Euro zone.

In this environment, net interest income (NII) for Spanish lenders—the difference between earnings on loans and deposit costs—rose 27% year-on-year in the first half of the year, prompting banks to upgrade their NII forecasts for 2023.

On the same day, Bankinter’s CEO Maria Dolores Dancausa expressed her belief that earnings from higher rates would see limited growth following the complete repricing of existing loans, although she did not specify when this favorable impact would conclude.

Additionally, Bank of Spain Deputy Governor Margarita Delgado remarked during the event that she anticipated a gradual increase in deposit rates in 2024 due to growing competition for deposits.