Europe’s biggest banks generated huge profits on 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 all beat analysts’ estimates.
Higher interest rates, which typically boost banks’ earnings, were the main driver, while strong performance in fixed income trading also helped lenders with big investment banks, such as Deutsche and Barclays.
Banks generate large profits on the difference between the interest they charge on loans, which rises in line with central bank interest rates, and what they pay customers for deposits, which lag behind interest rate rises.
UniCredit chief executive Andrea Orcel admitted that central bank policy was a factor in his group’s strong results, saying they were “the result of good commercial dynamics, a favorable interest rate environment, continued cost discipline, a low cost of risk, and most importantly the commitment and work of our people” .
The profits are an attractive target for cash-strapped states. In July, Spain became the first western European country to propose a windfall tax on bank income, following in the footsteps of Hungary, which has already introduced one. Spain’s plans put it on a potential collision course with the European Central Bank.
Britain’s new chancellor, Jeremy Hunt, is also preparing to maintain a bank levy in a set of tax hikes aimed at undoing the disastrous effects of a short-lived tax cut budget unveiled by his predecessor.
On Tuesday, opposition MPs in the UK called on the government to hit banks with a windfall tax after HSBC’s strong quarterly results. “The public will find it hard to tolerate banks raking in big profits while their mortgage bills spiral out of control,” said Sarah Olney, spokeswoman for the Liberal Democrat Treasury.
“The chancellor should really look into taxing the excess profits of the banks, especially if the alternative is painful cuts to our public services,” she said
HSBC chief executive Noel Quinn opposed the proposed tax. “The UK currently already has a tax burden on the financial services sector that is higher than business generally in the UK,” he said on Tuesday. “I hope it will not be a windfall, but that is a matter for the chancellor to decide.”
CS. Venkatakrishnan, chief executive of Barclays, told reporters on Wednesday that London’s “predictable tax system” was an important part of its status as a global financial center but that “we will await the government’s decision on these things”.
Bank of England rates have risen to 2.25 percent, from 0.1 percent last year, while banking analysts expect the ECB to raise rates from 0.75 percent to 2.5 percent next year.
Barclays reported pre-tax profit of £1.97 billion for the three months to the end of September, up 6 percent from a year ago and beating analysts’ expectations of £1.81 billion.
Deutsche Bank’s pre-tax profit more than doubled to 1.6 billion euros in the third quarter, the highest for the period since 2006 and above analysts’ average expectations of 1.3 billion euros. All four of the bank’s divisions posted higher earnings, and its investment banking unit gained market share in fixed income trading.
Santander, the euro zone’s biggest lender, reported an 11 percent year-on-year rise in net income to 2.42 billion euros 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 credit losses by 24 percent to 2.76 billion euros as inflation and higher interest rates put more businesses and consumers under stress. But while default rates rose in the US and Brazil, they fell in the UK, Spain and Mexico.
Milan-based UniCredit said net profit this year would exceed 4.8 billion euros, higher than its previous guidance, due to rising interest rates and better-than-expected third-quarter earnings. Italy’s second-biggest bank reported a record profit of 1.71 billion euros in the three months ended September, 1 billion euros higher than analysts had forecast, thanks to lower-than-expected loan losses.
StanChart’s third-quarter profits came in higher than expected on rising interest rates, with Singapore’s contribution to the bank’s earnings outstripping Hong Kong, which has struggled to recover from strict pandemic restrictions. The bank reported pretax profit of $1.4 billion in the third quarter, up 40 percent from a year earlier and beating analysts’ estimates of $1.1 billion.
The outperformance from StanChart follows rival lender HSBC posting big third-quarter profits on Tuesday and comes despite recent turmoil at home with wild swings in UK government bonds.
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