The banking turmoil that has sunk four US regional lenders and threatens to claim more victims in California has mostly left Europe untouched — at least so far. Apart from the failure of Credit Suisse Group AG, an already troubled Swiss bank with shrinking returns, there have been no signs of the bank runs that killed off Silicon Valley Bank, First Republic Bank and others. Still, there was some anecdotal evidence of money moving to bigger, safer European banks, at least among large corporate depositors in the first-quarter results of France’s BNP Paribas SA and Italy’s UniCredit SpA last week. Depositors are also shifting cash from overnight to higher-paying term deposits, which will squeeze lending margins.
But several key differences with the US banking sector ought to give Europe a better chance of stability in the months ahead. These include tighter regulation of smaller banks, fewer choices for customers about where to put spare cash, and slower deposit growth during the Covid pandemic, which means a smaller contraction after. Many European lenders have also cut exposure to the US: BNP’s sale of its California-based business Banc West, completed in February, could hardly have been timed better.
Most European lenders saw deposits decline in the first quarter versus the final three months of last year. Barclays Plc of the UK was a notable exception because its US business gained from the substantial flight to quality within American banking. But beneath the headline levels, BNP attracted inflows from big corporate depositors later in the quarter, according to Lars Machenil, its chief financial officer, while UniCredit Chief Executive Officer Andrea Orcel said that the profitability of larger, stronger banks could benefit from their safe-harbor character.
“Depositors are giving a greater value to banks that are better capitalized, better covered, more liquid, less risky,” he told investors on the bank’s earnings call. “[A] depositor will say, I’ll take a slightly lower deposit base rate because this bank will give me the money back.” Big banks that saw larger deposit outflows included Deutsche Bank AG, which suffered in the wake of Credit Suisse’s collapse because some investors are just used to viewing it as a weak link. This time, the Frankfurt-based institution swiftly shrugged off that market reaction.
NatWest Group Plc of the UK also saw greater outflows than most and faced a lot of questions about deposits on its earnings call. The bank has a high share of corporate deposits, which tend to be quicker to move to other lenders and seek higher available rates. However, NatWest said its deposit losses were in line with its expectations due to customers’ tax payments and the closing of accounts in the Irish Republic as it withdraws its Ulster Bank brand from that market.
The big difference between the US and Europe has been the sharper growth and contraction in American deposit levels in recent years, which has been a major source of instability. Total US deposits jumped 36% from pre-Covid levels to a peak of more than $18 trillion last year. They have since shrunk 5%. In the euro zone, total deposits only grew by 24% from early 2020 to a peak of €14 trillion ($15.4 trillion) this year and have since declined only 2%.
European depositors also have less choice about where to keep their cash: Money market funds are less developed than in the US, while the lack of a true single banking market in Europe makes it harder for customers in one country to use a bank from another country. Banks’ lending margins will still get squeezed by customers putting more money into higher-interest savings accounts or term deposits, which is happening. Across the euro zone, households have pulled €56.9 billion from overnight deposit accounts and added €46.5 billion to accounts with terms of up to two years, according to Fred Ducrozet, head of macroeconomic research at Pictet Wealth Management.
But even this potential drag on earnings looks limited so far. Most European banks that have reported first-quarter numbers have maintained or increased their guidance for this year’s net interest income, according to Anke Reingen, banking analyst at RBC Capital Markets. Several firms have also said 2023 is likely to be the peak for this source of revenue. But this is more about profitability than stability.
There are further sources of tension to come from the repayments due on all of the European Central Bank’s ultra-cheap funding programs, known as Targeted Longer-Term Refinancing Operations. However, the ECB has been allowing banks to repay this money early, which has cut the amounts due in June to less than €500 billion from more than €1 trillion. Christine Lagarde, ECB president, said on Thursday that this had diluted any potential cliff effect and made the remaining repayments easier for banks to cope with. “I know that banks have prepared for it and that there is a lot of liquidity out there to continue to prepare,” she said. Stubborn inflation and a return to normal interest rates after years of negative interest rates in Europe are going to hit profits at some point. But there are reasons to take comfort that the relative stability in the region’s banks can be sustained.