Bank profitability will reach record levels in 2023, but is expected to decline thereafter, a trend that will intensify after the interest rate cut from mid-2024. Interest expenses have tripled in 9 months.

Banks’ profitability is expected to weaken in the new year, a trend that will be reinforced by the gradual reduction in interest rates expected from mid-2024.

The year ends with an impressively strong performance by domestic banks, with profitability reaching record levels as a result of the extremely favourable interest rate environment.

The ECB’s sharp rise in interest rates led to a surge in banks’ interest income, as they benefited from the almost immediate pass-through of the increases to borrowers. At the same time, they were able to pass on the increases to depositors to a lesser extent due to the excess liquidity in the system and the structure of deposits with the absolute dominance of demand deposits. 

The limited volume of deposits and the small size of the average deposit make it pointless for depositors to seek better returns through time deposits. As a result, the bulk of deposits remain demand deposits with very low interest rates.

Despite this policy, however, the rise in interest rates is gradually being passed on to depositors, albeit with a time lag. It is significant that in the nine-month period from January to September, according to the Bank of Greece, banks’ interest income increased by +96.5%, while interest expenses amounted to €4.07 billion, an increase of +211.30%.

Thus, the final picture of bank profits for the nine months is a modest +4.6%, far from the impressive +96.5% of interest income.

Bank executives estimate that bank profits will peak this year, largely due to the positive interest rate environment, and gradually decline in the following years, while remaining at a high level.

They note that pressure on interest expenses will intensify, while the gradual decline in interest rates that most expect after the first half of 2024 will lead to a decline in interest income.

Moreover, despite claims to the contrary, there is fierce competition among commercial banks in corporate lending, where credit growth is strongest, and this competition is driving down interest margins.

Despite the expected decline in bank profitability from the highs of 2023, the overall picture for profitability in the sector will remain very satisfactory. Moreover, profitability is expected to increase further as large banks continue to cut costs and reduce their branch networks.

Original Story: Yiannis Papadogiannis | Business Daily Greece
Image: Photo by Takis Kolokotronis in FreeImages
Edition: Prime Yield