Next year will be a transition period for European banks as the sector moves to a lower interest rate environment, according to analysts at Goldman Sachs (NYSE:GS).
The current environment is characterised by flattish net interest income (NII), higher fees, manageable operating expenses (opex), and credit costs, the analysts said.
On Thursday, the Bank of England held UK interest rates at 5.25%, with broad market expectations that the US Federal Reserve is preparing for a rate cut.
Analysts forecast that the shift towards lower interest rates supports sustained double-digit return on tangible equity (ROTE) over the medium term.
Since late November, rate expectations for 2024 and 2025 have changed significantly.
Investors have expressed concerns about a risk to bank earnings from a higher Marginal Reserve Rate (MRR) or an introduction of tiering on European Central Bank (ECB) deposits, Goldman analysts said in a report on Thursday.
Goldman analysts forecast that a 100 basis points (bps) move in rates would drive a 4% to 5% decline in NII, compared to an approximately 7% move per 100 bps in line with formerly rising rates so far this cycle.
This "reduced sensitivity" to incremental cuts reflects “increased hedging” locking in the benefit of higher rates, and the outsized benefit from earlier hikes, as policy rates transitioned out of negative territory, Goldman said in a research note.
“We estimate that a 1pp increase in the MRR (a doubling vs current levels) would result in a 1% drop in 2024 GSe NII, a c.2% drop in PBT/net profit and a c.25bp reduction in ROTE (average annualised basis),” Goldman analysts said.
They predict that tiering would “reduce the amount of deposits” at the ECB eligible for remuneration at the Deposit Facility Rate (DFR).
Since late September, the ECB no longer remunerates the minimum reserves held at the central bank, after previously having paid the deposit facility rate.