Key week kicks off as the ECB approves its first rate hike and fears the tax impact on its accounts
The financial entities had overcome the coronavirus crisis, not without difficulties due to a sudden economic paralysis that they gradually managed to overcome. However, the Russian invasion of Ukraine has also broken through in this sector, triggering inflation that has already risen in recent months and a new direction in the European Central Bank’s (ECB’s) monetary policy: raising interest rates.
For years, over a decade, banks have had to adapt their business model to a context where the official price of money is 0%; but with many other rates associated with its negative products, such as the Euribor in mortgages. Until early 2020, just before the covid spread around the world, the entire sector called for a “normalization” of the ECB’s monetary policy. Through normalization, they understand that rates have gone up because it’s the foundation of their business: raising money for loans and reimbursing deposits. Nothing has been like this in the past decade.
The interest margin has been the handicap of Spanish and European financial entities in recent years. That is, the difference between the credits and loans that the entity has on its balance sheet and what the bank pays, among other things, for deposits. This ratio, coexisting in a long-term stage with rates close to 0%, has not developed as favorably as it had until the previous financial crisis.
During the year 2021, the major bank closed with an interest margin of more than 18,000 million euros. However, the entities are counting down the days for the ECB to intervene (it will be next Thursday, July 21), as they estimate that a one percentage point rate hike would allow them to increase the interest margin by about EUR 3,100 million to 12 months. ahead, which is the time the banks estimate must pass before their accounts reflect this rise. The sensitivity of the interest margin of Spanish banks to interest rate increases is quite high due to the type of company that is highly specialized in mortgages, loans and deposits. In short, if the ECB raises interest rates, it will be good for them.
In fact, the Euribor has already appreciated in recent weeks, ahead of the action of the body chaired by Christine Lagarde. The main mortgage index used in Spain has moved from negative at the end of 2021 (then -0.5%) to around 0.8% (in positive territory) in recent days. The mortgages reviewed these weeks have seen their stock rise by an average of 100 euros per month by transferring this new phase of rising rates.
And that is exactly the hook that the head of government, Pedro Sánchez, wanted to use when he announced that the new tax on extraordinary profits will also apply to the banking system. The reason? That the bank is “already starting to benefit from the rise in interest rates.” This was indicated during the debate on the state of the nation. The doubt will lie in defining what constitutes an extraordinary gain associated with the ECB’s interest rate hike. Because this decision by Fráncort would not be unprecedented. He has done it on many other occasions.
The Executive estimates that the tribute will bring in €1,500 million in banks each of the next two years. In 2021, the entities achieved a net result of just over 20,000 million euros. In the first quarter of the year, they exceeded 5,000 million worldwide and 2,000 million for their business in Spain. Next week, all companies will present their results through June and estimates suggest they can significantly increase their profits. The S&P firm has already calculated that this special tax on banks will account for 12% of expected profits for 2023 and 2024.
And the financial entities as a whole have foreseen that this tax decision could have consequences: credit restrictions, fewer investors and an increase in commissions to transfer this reality to the customer. Commissions are precisely the tool entities have used most in recent years to improve their income statement in the face of low interest rates. The EUR 2,756 million entered by the five major financial entities for commissions to their clients in Spain has skyrocketed to 38.3% of the weight of this type of revenue in their business as a whole, even surpassing last year’s record of 10,729 at the end of the year.
Source: La Verdad
I’m Wayne Wickman, a professional journalist and author for Today Times Live. My specialty is covering global news and current events, offering readers a unique perspective on the world’s most pressing issues. I’m passionate about storytelling and helping people stay informed on the goings-on of our planet.
