Some of Europe's largest banks warned of growing risks as the economy fizzles after posting stronger-than-expected profits on Wednesday, helped by a trading boom in volatile markets and higher interest rates.
The boost from the rising cost of borrowing, kept at rock bottom since the financial crash more than a decade ago, is a relief for banks, although it risks causing other problems, like hitting demand for loans and bursting property price bubbles. The performance of the five European banks compares favourably with more mixed results from U.S. rivals, where profits declined largely because investment banks were battered by a slump in dealmaking.
European banks, which are traditionally less reliant on deals for revenue than their U.S. competitors, have been cashing in on central bank efforts to arrest runaway inflation.
For years, banks bemoaned ultra loose monetary policy, but now higher interest rates means banks can start to benefit from the increased gap between what they charge borrowers and what they pay savers.
On Thursday, the European Central Bank (ECB) is set to raise the cost of borrowing further, offering an additional lift to banks.
"Some banks have huge increases in interest income," said Jerome Legras of Axiom Alternative Investments.
"For the short term, it's good," he said, while cautioning about risks. "In terms of what will happen for corporate risk and mortgages, nobody really knows."
Deutsche Bank's finance chief James von Moltke told journalists that loan growth would "undoubtedly" slow "going into a weaker economic environment".
Banks turn in fortunes is bitter sweet. It could attract the attention of political leaders, seeking to cover the costs of war and an energy crisis.
The Spanish parliament is debating a proposal that involves a 4.8% charge on banks' net interest income and net commissions.
A source familiar with the British government's plans said new finance minister Jeremy Hunt was reviewing the surcharge on bank profits and would confirm the level later this month.
Shares of European banks (.SX7E) have lost around 25% from their peaks before Russia's invasion of Ukraine, as investors fret about how a growing energy crisis, a weakening economy and soaring inflation will hurt their bottom lines.
