Deutsche Bank says European banks face a conundrum: their customers are taking out few loans but depositing lots of cash, despite unprecedented low interest rates. In the Euro Area, lending to the private sector is at the same level as in 2009, while deposit volumes are up almost a quarter.

 

DB says that traditionally, banks in Europe lend significantly more to households and firms than they fund through deposits. Now, the surplus of loans over deposits has fallen to its lowest level — just €770bn — since the start of the monetary union in 1999.

The bank says that back in 2009, the gap was about €2.5tn. Even on a shorter time horizon, the puzzling picture remains: corporate lending at the moment is flat yoy (year-on-year), and retail loans are up only 2%, whereas private-sector deposits are expanding at 4.4%, the highest growth rate since 2009.

DB says the “deposit glut” is also a Europe-wide phenomenon and not just confined to countries with strong growth and income dynamics: deposit expansion in Italy, Spain and Portugal is very solid, too. What makes this truly remarkable is the exceptionally low costs and benefits of loans and deposits, respectively, for bank customers.

Lending rates for corporates have never been lower — they are being charged about 1.3% p.a. for an average new loan larger than €1m, down from 5% in 2007/08. Likewise, households’ sight deposits yield only 8 basis points (bp: 100 + 1%0 any more, down from 1.2%. Hence, it has never been more attractive to borrow, at least in nominal terms, and it has never been less rewarding to save. Nonetheless, firms and households in the Euro Area are boosting their saving but not increasing their level of (bank) debt.

Jan Schildbach, Deutsche Bank economist, says:

Net interest income is the largest revenue source for European banks, accounting for 54% of the total in 2015. But with virtually no volume growth and margins under pressure due to aggressive monetary easing, net interest income has been on a downward trend since 2010. Currently, i.e. for the first nine months of this year, it is down 4% yoy at the 20 largest European banks, a good proxy for the entire sector. Any hopes of this being offset by greater earnings from fees and commissions have not materialised to date – on the contrary, they are also down 6%. Finally, trading income, a less reliable income component, is 28% below its prior-year level. In total this makes Europe banks 2016 earningsfor a substantial revenue drop of 5%. These figures have improved slightly recently, thanks to somewhat better market conditions in Q3, following a poor H1. Nevertheless, 2016 looks like a setback on the path to recovery for European banks.

Schildbach said loan loss provisions continue to retreat at big European banks but only modestly (-5%). Bottom line, net income between January and September 2016 shrank 4%.