Deutsche Bank, ING Face New Blow as ECB Mulls Higher Reserves

European lenders including Deutsche Bank AG and ING Groep NV may suffer yet another setback on their arduous path to winning back investors, this time delivered by the European Central Bank.

(Bloomberg) — European lenders including Deutsche Bank AG and ING Groep NV may suffer yet another setback on their arduous path to winning back investors, this time delivered by the European Central Bank.

Some ECB Governing Council members want to force banks to hold more money at the institution, which could entail a revenue loss for the region’s lenders of €66 billion ($70 billion) in the most extreme scenario, according to Bloomberg News calculations. Deutsche Bank and ING would be among the lenders facing the biggest profit hits from the decision, according to UBS Group AG research estimates. 

The move would likely exacerbate tensions between the ECB and banks in the region, which have been complaining about intrusive supervisory practices and excessive regulatory burdens as they try to close the valuation gap with their US peers. It would also compound the headwinds from special bank taxes imposed by governments around the region. Commerzbank AG Chief Financial Officer Bettina Orlopp this month called the discussion at the ECB “crazy.”

The very low market capitalizations of European banks partly stem from “the negative impact of interventions from politicians, regulators and central banks over the past years,” said Alexandra Annecke, a portfolio manager at Union Investment. “Investors want stable and dependable conditions. We’re not getting those at the moment.”

Banks in the euro area are required to keep an amount of money at the ECB that’s equivalent to 1% of their most common forms of deposits, or currently €165.3 billion. The central bank decided in July to scrap interest on that money, which means the affected lenders lose out on annual payments of about €6.6 billion. 

Each percentage point increase in the so-called minimum reserve requirement would shave an average of 2% off banks’ annual earnings, UBS researchers including Reinout De Bock said in a note on Thursday. 

Most economists predict that the ECB will raise the reserve requirement within the next 12 months, according to a survey conducted by Bloomberg News earlier this month. The vast majority of those anticipating an increase said it will be by 1 percentage point.

That’s the raise proposed by some members of the ECB Governing Council, according to the central bank’s July meeting notes, published in late August. The most extreme demand has come from Austrian Central Bank Governor Robert Holzmann, who wants to hike it to as much as 10%.

The fallout of any increase would likely run counter to the desire professed by the ECB’s banking supervision arm to see higher bank valuations. The ECB has previously criticized plans by several European governments to enact levies on banks in part because they have hit share prices. Some officials have acknowledged that the oversight arm’s restrictions on dividends during the pandemic also damaged banks in the eyes of investors.

Investors “struggle to understand” why the ECB would want to raise the minimum reserve since the decision would deliver “material hits to bank profits and liquidity ratios,” the UBS researchers said in the note. “There have been a number of incidents where ECB policy unexpectedly changed the outlook for bank profits.”

The backers of higher reserve requirements say they would help tighten monetary policy by reducing liquidity in the banking industry. In addition, some Governing Council members have indicated the move could be a way to reduce losses at central banks as it would cut into banks’ voluntary deposits at the ECB, on which it pays interest. 

Bankers have slammed the idea as a tax on deposits, with the starkest criticism coming from Germany, home to Europe’s biggest pile of savings. Deutsche Bank has previously said it stands to lose out on about €200 million of revenue from the loss of interest on its minimum reserves at the ECB under current rules.

If the ECB were to raise the reserve requirement, the revenue lost by banks would likely be smaller than the windfall they have made from the rapid series of interest rate increases this year and last. 

Europe’s top banks will start reporting earnings for the third quarter next week and analysts expect net interest income, which is the difference between money earned by banks on loans and paid by them on deposits, to jump by 19%, according to Bloomberg-compiled estimates. The total figure for the biggest lenders is likely to reach almost €163 billion this year, although it’s expected to stagnate in 2024, the estimates show.

To be sure, Europe’s top central bankers are divided on whether to raise reserve requirements for banks and by how much, meaning lenders may see a smaller additional hit than feared or even none at all.

While the ECB is likely to opt for the “careful route” of only doubling the reserve requirement, the measure could still weigh on banks’ plans for dividends and buybacks, Allianz Global Investors credit analyst Simon Outin said.

“This is an industry with heavy public involvement,” Outin said. “Unfortunately when such measures appear uncoordinated, it can produce a kind of discontent with the sector given a lack of predictability.”

–With assistance from Harumi Ichikura, Jana Randow and Alexander Weber.

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