European Central Bank predicts bank profits to remain weak next year

Business | 25 Nov 2020 8:41 pm

Profits at European banks will not return to pre-pandemic levels before 2022, the region’s central bank warned today in its latest financial stability review, CNBC reports.

Lenders in the eurozone have struggled to make sizeable profits over the last decade following the 2008 global financial crisis, with stronger regulatory scrutiny and low interest rates. However, the coronavirus-induced crisis has worsened bottom lines further and that will continue to be felt over the coming months, according to the European Central Bank.

“Bank profitability is expected to remain weak,” Luis de Guindos, vice president at the ECB, said in a statement.

If a bank presents consistently low profits that could hurt its ability to lend money to businesses and individuals. A banking system’s overall profitability also reflects the health of that economy.

In an interview with CNBC’s Annette Weisbach, de Guindos said that “to improve the valuation, we have to increase the profitability of European banks.”

“I think they have to make a wholehearted effort to reduce the costs they are having now, to improve the cost-to-income ratio, to get rid of the excess capacity, so there are some measures that they have to take rapidly,” he said.

Market expectations point to an overall return on equity (ROE) — a measure of banking profitability — of 1.7 percent this year, followed by 3.1 percent and 5 percent in 2021 and 2022, respectively. The ROE of euro area banks stood at around 6 percent in June of 2019, according to ECB data.

However, “with the recent resurgence in infections and new containment measures, it is likely that profitability forecasts will be revised downwards, as it is also uncertain when a vaccine will be available for a larger share of the population,” the ECB warned in its report.

“Ongoing weak profitability might hamper banks’ capacity to support lending to the real economy in the months ahead, not least as interest rates are expected to remain low for a substantial period to come,” the ECB said in its review.

The banking system is seen as a key element to support the economic recovery in the wake of the pandemic. Many businesses will be looking for new funding to rebuild their work after months of being on stand-by.

However, interest rates — which are what banks charge for lending money — are expected to remain low as the ECB continues with its ultra-loose monetary policy.

The pan-European Stoxx 600 banking index is down by about 22 percent since the start of the year.

Today, the Financial Times reported, citing an unnamed senior ECB executive, that euro zone banks will once again be able to pay dividends to investors from 2021.

Dividend payouts have temporarily been suspended in the euro area in the wake of the pandemic.

However, when speaking to CNBC, de Guindos said that “so far no decision has been taken” on this matter. He added though that a decision will be linked to the upcoming economic forecasts, which the central bank will release on December 10.-Graphic: ECB



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