Written by 7:38 am Europe Economy

Rising interest rates have a sting in the tail for Europe’s banks


In the background, trouble looms.

There were 23,885 court judgements against UK businesses owing money in the last quarter of 2022, a year-on-year increase of more than half and a sign of growing distress among small firms, according to business recovery firm Begbies Traynor Group.

“It’s a bit of a paradox for the banks because… they’re serving customers who are struggling day to day,” said Tom Merry, banking strategy consultant at Accenture.

The British property market is also wobbling. House prices slid 2.5% in the fourth quarter of last year, the biggest three-month drop since the financial crisis.

In the wake of market chaos unleashed by former Prime Minister Liz Truss’s tax-cutting plans in September, lenders withdrew around 1,700 mortgage products in a week, before reintroducing them at rates 1-2 percentage points higher. That will hurt borrowers.

Values on commercial real estate, such as offices, also fell, sliding more than 13% on average in 2022, CBRE’s Monthly Index showed.

Investor jitters, and attempts to withdraw money, led BlackRock, M&G and others to put some property fund withdrawals on hold. Some 15 billion pounds in assets are in limbo.

Jackie Bowie of risk management firm Chatham Financial said banks faced having to inject more money into big-ticket property investments.

In Germany, a similar picture is emerging. Its largest lender, Deutsche Bank, is profiting from rising rates and is expected to post a tenth consecutive quarter of profit, the longest streak in at least a decade.

Analysts expect the greatest gains from its corporate and retail divisions that benefit from higher rates, although revenue at its global investment bank will likely slip from a slump in dealmaking.

But threats remain. Banks in Germany and Austria have been particularly active in commercial property, according to the European Banking Authority, which analysed the 1.3-trillion-euro-plus of commercial property lending across the European Union.

Germany’s financial regulator BaFin recently warned that a rapid rise in interest rates could weigh on some banks, and that loans may sour.

Deal-making too is unlikely to save banks as big corporate financial transactions such as takeovers or stock-market listings slump. That sparked a round of layoffs on Wall Street.

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