26 July 2023
Major European banks including Deutsche Bank and Lloyds Banking Group warned about the increasing risk of bad loans due to slow global growth and high inflation. Lloyds’ shares dropped 3% as it faced higher charges for potentially sour loans, up 76% to £662 million ($855 million), affecting its profit expectations. Meanwhile, UniCredit reported strong earnings in Q2 due to higher interest rates, although it anticipates a significant increase in its risk costs.
The International Monetary Fund (IMF) slightly raised its 2023 global growth estimates but cautioned that persistent challenges were affecting the medium-term outlook. Also, the European Central Bank reported a record low demand for loans last quarter as banks continued to tighten credit access.
Germany’s Deutsche Bank said provisions for bad loans almost doubled to €401 million in Q2, indicating a softening in some sectors. Similarly, Spain’s Santander saw a 52% YoY drop in Q2 net profit in Brazil due to inflation-driven cost rises and a 4.3% decrease in net interest income.
EU banking regulators will soon publish stress test results to assess banks’ resilience to long-term high inflation and interest rates. Despite the challenges, higher rates have boosted some banks’ performance. For instance, UniCredit raised its net profit and shareholder reward targets for the year, pushing its shares up around 2%.