Europe’s largest banks generated huge profits on the back of rising interest rates in the third quarter, raising the prospect of governments targeting the lenders with windfall taxes.
Deutsche Bank on Wednesday reported one of its strongest quarterly performances since before the financial crisis and is on course for its best annual profits since 2009, while Barclays, Santander, UniCredit, Standard Chartered, HSBC and UBS have all beaten analysts’ estimates.
Higher interest rates, which typically boost bank earnings, were the main reason, while strong performance in fixed-income trading also helped lenders with large investment banks, such as Deutsche and Barclays.
Banks generate large profits from the difference between the interest they charge on loans, which rises in line with central bank interest rates, and on what they pay to customers for deposits, which lag behind rate increases.
UniCredit’s chief executive Andrea Orcel conceded that central bank policies were a factor in his group’s strong results, saying they were “the outcome of good commercial dynamics, a favourable interest rate environment, continued cost discipline, a low cost of risk, and most importantly the commitment and work of our employees”.
The profits are an attractive target for cash-strapped governments. In July, Spain became the first western European country to propose a windfall tax on bank earnings, following in the footsteps of Hungary, which has already introduced one. Spain’s plans set it on a potential collision course with the European Central Bank.
The UK’s new chancellor, Jeremy Hunt, is also preparing to maintain a bank levy in a set of tax rises designed to undo the disastrous impact of a shortlived tax-cutting Budget unveiled by his predecessor.
On Tuesday, opposition MPs in the UK called on the government to hit banks with a windfall tax following HSBC’s strong quarterly results. “The public will find it hard to stomach banks raking in large profits whilst their mortgage bills spiral out of control,” said Liberal Democrat Treasury spokesperson Sarah Olney.
“The chancellor should certainly explore taxing excess profits from the banks, especially if the alternative is painful cuts to our public services,” she said
HSBC’s chief executive Noel Quinn resisted the proposed tax. “The UK at the moment already has a tax burden on the financial services sector that is higher than corporates generally in the UK,” he said on Tuesday. “I would hope that there isn’t a windfall tax, but that’s a matter for the chancellor to decide.”
Bank of England interest rates have risen to 2.25 per cent, from 0.1 per cent last year, while bank analysts expect the ECB to raise interest rates from 0.75 per cent to 2.5 per cent next year.
Barclays reported a pre-tax profit of £1.97bn for the three months to the end of September, up 6 per cent from a year ago and beating analysts’ expectations of £1.81bn.
Deutsche Bank’s pre-tax profit more than doubled to €1.6bn in the third quarter, the highest for the period since 2006 and above the average analyst expectation of €1.3bn. All four divisions of the bank posted higher revenue, with its investment bank unit gaining market share in fixed-income trading.
Santander, the eurozone’s biggest lender, reported an 11 per cent year-on-year increase in net income to €2.42bn in the third quarter, beating expectations but marking a slowdown from growth in the previous three months.
The Spanish bank increased its reserves for potential loan losses by 24 per cent to €2.76bn as inflation and higher interest rates put more businesses and consumers under stress. But while default rates increased in the US and Brazil, they fell in the UK, Spain and Mexico.
Milan-based UniCredit said net profit this year would exceed €4.8bn, higher than its previous guidance, due to rising interest rates and better than expected third-quarter earnings. Italy’s second-largest bank reported a record €1.71bn profit in the three months ending in September, higher than the €1bn analysts had forecast thanks to lower than expected loan losses.
StanChart’s third-quarter profits came in higher than expected due to rising interest rates, with Singapore’s contribution to the bank’s bottom line surpassing that of Hong Kong, which has struggled to recover from strict pandemic restrictions. The bank reported pre-tax profit of $1.4bn in the third quarter, up 40 per cent from a year earlier and beating analyst estimates of $1.1bn.
The outperformance from StanChart follows rival lender HSBC posting bumper third-quarter profits on Tuesday and comes despite recent tumult in its home market with wild swings in UK government bonds.