The interest rate turnaround initiated by the European Central Bank (ECB) in June will, according to ZEB partner Heinz-Gerd Stickling, slightly reduce net interest income, but will not lead to drastic changes in the earnings structure of German banks. The banks are expected to be able to maintain the generally elevated level of interest income, with only slight changes.

The ECB ended its series of interest rate hikes with a 0.25% cut. This followed ten increases over the past two years, that came after a long period of negative interest rates. This resulted in a dramatic increase in banks' interest income, as Stickling explained in an interview with Börsen-Zeitung.

The stronger their deposit business, the more financial institutions would have benefited. „Now we have the interest rate turnaround in the opposite direction, but we will not experience a return to a zero or negative interest rate phase," said Stickling. Whether further rate cuts will follow – and if so, when and how significant they will be – is still a matter of speculation. Another rate cut in September seems certain at this point, while an additional one in December is more uncertain.

„This year, interest surpluses will look good“, said Stickling. „The real question is whether banks can manage to keep their costs under control.“ According to his assessment, declining interest surpluses will become more of an issue next year as margins from the deposit business are likely to narrow further. Net interest income may decrease slightly before rising again, as long-term structural effects start to have a positive impact.

A forecast for the 50 largest European banks by balance sheet size shows that they experienced their best year since the financial crisis in 2023, with a cumulative operating profit of 260 billion euros, thanks to high interest surpluses and manageable risk costs. The projected interest income for this year is 432 billion euros, slightly above the 2023 figure, with a slight decline to 428 billion euros in 2025.

Interest income remains significantly above pre-2023 levels. According to Stickling, the same trend applies to German banks, with regional banks being even greater beneficiaries of the interest rate turnaround.

„The worst-case scenario for interest surpluses would have been a continuation of the low-interest phase“, he stated. „Therefore, no one is happier about the mid-2022 interest rate turnaround than the banks.“

Deposit volumes have remained stable so far. It is possible that „fear saving“ is playing a role, with people setting aside financial buffers due to economic and geopolitical uncertainties.

According to reports, other revenue components of German banks are holding steady. Stickling is confident that fee income remains stable and will continue to do so. This includes account maintenance fees, which are the largest fee component for retail banks, as well as normalized securities and insurance commissions.

Trading earnings are being boosted by increased transactions, particularly in times of significant uncertainty and high volatility.

The major unknown is future risk provisioning. „This could impact banks if we enter a recession“, notes Stickling. However, he believes that risks have so far been properly priced, and provisions made.

The situation varies by segment. „Many problems in the real estate market are driven by interest rates. If rates decrease, these problems should not worsen further," he says. Residential real estate financing faces no major issues. Commercial real estate, particularly office properties, might still be challenging, though Stickling is optimistic that the worst is over.

In corporate banking, while interest rate cuts at the short end of the yield curve are relevant for working capital loans, the interest cost component is generally overestimated. A classic recession would pose a greater problem for corporate banking, though this is not currently evident.

After significant declines, the mortgage lending business is starting to recover, though it remains below previous levels. The German savings banks association (DSGV) reported a 16% increase in new loan commitments to 25 billion euros in the first half of the year. Overall, savings banks issued 66 billion euros in new loans in the first half of the year, 2% more than the previous year.

„If bank lending in mortgage financing increases, it's essentially a base effect", states Stickling. "The volume had dropped sharply and is now gradually recovering. This results in impressive growth rates, but compared to previous years, the level is still low.“

With lower interest rates, more people and businesses can afford loans, leading to increased demand. However, this effect should not be overstated. For instance, ING Germany notes that, in response to inquiries about how the interest rate cuts are affecting its business, there are currently only minor impacts on its lending activities.

„Especially for mortgage financing conditions, there has been no significant change in the market, as these are fundamentally based on long-term market interest rates. The recent interest rate cut had already been factored into market expectations“, said an ING spokesperson.

The Sparkassen- und Giroverband Hessen-Thüringen (SGVHT) confirms this view. The ECB interest rate cut was no surprise, and the association, which includes 48 savings banks, expects future interest rate cuts to stabilise lending activities in the short term.

Comparing May and June 2024, there have been minimal changes. For example, interest income increased by 0.01 percentage points to 2.39%. Fee income remained unchanged, customer deposits decreased slightly, and loan volumes increased minimally. If the ECB's interest rate step effective from June 12 had any impact on the SGVHT's figures, the effect was minimal – mainly due to the short time span between the rate cut and the end of the month.

BBBank had already anticipated the rate cut for 2024 and incorporated it into its planning. The expected interest surplus for this year is projected to shrink by around 10% due to higher interest expenses compared to 2023, while the commission income is expected to provide a „continuously stable significant contribution“ to the overall results. According to a spokesperson, the new business in mortgage financing remains stable and can be expanded. The cooperative bank based in Karlsruhe anticipates an increase of more than 2% in its loan portfolio and more than 5% in customer deposits.

Targobank expects further rate cuts to support private consumption, mortgage lending, and corporate investment. But the impact is difficult to quantify due to various factors, with interest rates being only one among many, such as capital needs, product offering strategies, and competitive conditions.

The Sparda Banks association has observed no significant changes since the rate cut. While some impact on interest income is expected, it cannot be precisely quantified at this time.