Rates boost European banks' profits and improve outlook for investing
Interest rate hikes (which appear to have peaked) are boosting banks' earnings and improving the sector's investment outlook.
Rising interest rates tend to make lending more profitable, as they increase the profit margin for those institutions that lend in the form of mortgages or financing. It is therefore not surprising that some banks are doing very well. To take the first example, this is the case with Commerzbank. In the first nine months of the year, the Frankfurt-based bank doubled its profits: from January to September, they amounted to €1.8 billion.
Positive financial results also have an impact on ratings. This is the case for Deutsche Bank, whose share price saw Fitch change its rating from 'hold' to 'buy'. This change in rating - justified by a better-than-expected third quarter net profit of over €1 billion (although down 8% year-on-year) - has seen the German bank's share price rise by 3.2% in the last five days.
Monte dei Paschi also received an upgrade from Fitch, which gave it a BB rating, sending the stock up 17.8% in the last five days. As reported in Milano Finanza, the Italian banking sector is expected to continue growing in the coming months, as evidenced by the fact that Keefe, Bruyette & Woods has raised its target price by an average of 45%.
Spanish banks are also reporting results that should not be overlooked. Banco Santander, for example, made a profit of €8.14 billion in the first nine months of the year, up 11% year-on-year. Caixabank also reported very positive figures, with profits expected to be up 50% on last year.
UK banks, on the other hand, appear to be the institutions that have benefited the least from this rate hike. Some examples: Barclays is down around 15% since the start of the year, Lloyds Banking Group is down 8.8% and Royal Bank of Scotland Group is down 25%.
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