Data from the European Banking Authority shows that the national financial sector ranks eighth among those that benefited most from the high interest rate context, in a list of thirty countries in the European Economic Area.
The rise in interest rates has contributed strongly to the growth of the financial margin of Portuguese banks, boosting their profits. The spread between interest received on loans and those paid on deposits contributed 79.3% to the increase in banking income, a percentage that is almost 30% higher than the European banking average. The national financial institutions are ranked eighth among those that benefited most from the high interest rate context in a list of thirty countries in the European Economic Area.
The European Central Bank has started raising interest rates in 2022 to combat high inflation, exacerbated by Russia’s invasion of Ukraine, with the deposit rate hitting a historic high of 4% throughout the cycle. The move has boosted European banks’ product offerings, relying on financial margins, with Portuguese banks in particular in focus. Here, the financial sector has gained 27.3% more as interest rates have risen than the European average of 62.3%, according to first-quarter data recently released by the European Banking Authority (EBA).
In the first three months of the year as a whole, the largest national banks – Caixa Geral de Depósitos, BCP, Novobanco, Santander and BPI – saw their financial margins grow by 20% to €2.4 billion, benefiting from the fact that variable-rate contracts represent 86.2% of the number of contracts in the portfolio and 79.1% of the outstanding balance, according to the 2023 Credit Market Monitoring Report released by the Bank of Portugal last week.
In addition to the preponderance of the variable interest rate, which made the impact of rising interest rates on credit automatic, helping the financial sector to provide such a large financial buffer was the policy of rewarding savings. While deposit rates in other countries have followed the evolution of interest rates set by the European Central Bank more closely, Portugal’s average new deposit rate has taken a long time to take off, with the country remaining at the bottom of Europe. The average rate currently stands at 2.72%, compared with 3.09% in the euro area.
National banks were only outperformed in this comparative analysis, conducted by the European Banking Agency, by seven other EEA countries, including Spain, where The financial margin contributed 81.1% to the banking product. In first place is Lithuania (97.8%), followed by Poland (87.3%) and Malta (86.1%). In the last position of this classification Liechtenstein, with a contribution of 19.9%, while in France, the margin contributed only 41.1%, in Germany 53% and in Italy 59.4%.
The margin has already reached its “peak”.
However, Portuguese bankers have already acknowledged that the fiscal space has “peaked” and that the trend is now downward, as the central bank under Christine Lagarde has begun to reverse monetary policy with its first rate cut after successive increases, scheduled for the June meeting. And it should not stop there. More than 80% of economists interviewed by Reuters expect the ECB to cut rates again at its September and December meetings.
The EBA itself mentioned this in its latest report. The entity, headed by José Manuel Campa, says that “the profitability of European banks increased significantly in 2023, driven by a significant increase in financial margins”, noting that “overall, banks were able to benefit from higher interest rates and strengthen their credibility margins.”
But “after the financial margin stabilized in mid-2023, some profitability indicators began to show the first signs of decline,” in a scenario in which “interest rates should have already peaked.” In this sense, he stresses that “the future interest rate scenario is expected to negatively impact banks’ financial margin.”
On the other hand, lower interest rates could boost Portuguese demand for credit, especially to buy a house, after a period of decline in the face of rising financing costs. As Jornal Económico writes, the same EBA report shows that credit to households is expected to grow by less than 1% this year, but will accelerate in the coming years. Forecasts suggest growth of 3% in 2025 and 3.4% in 2026.
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