Fitch: European Central Bank's cheap lending will offer limited relief to Eurozone banks

 
Chris Papadopoullos
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European Central Bank And Frankfurt Financial District
The Frankfurt-based ECB tried to offset the impact on banks from negative interest rates (Source: Getty)

Ratings agency Fitch has said Eurozone bank profits will continue to come under pressure despite a new wave of cheap lending from the central bank.

The European Central Bank (ECB) offered a new round of so-called targeted longer-term refinancing operations last week – cheap loans to banks that are available so long as banks lend more to the real economy. It is aimed at mitigating the impact on bank profits from negative interest rates after the bank cut its deposit rate to minus 0.4 per cent last week.

Bank shares have suffered this year on expectations that negative interest rates could eat into their profit margins.

“The ECB's action has no impact on bank ratings,” said Fitch.

“Very low interest rates are already making it more difficult for banks in the Eurozone to sustain profitability and return on equity remains well below pre-crisis levels,” Fitch said.

“Net interest margins are unlikely to see a material improvement until either competition eases or more banks pass on negative rates to their customers. Most are reluctant to consider this, but the longer the period of negative rates continues, the more earnings come under pressure.”

“We do not believe Thursday's measures will have a major additional impact on banks' profits or their willingness to lend.”

Fitch believes the overall package announced by the ECB last week, which also involved ramping up its asset purchase programme to €80bn (£62bn) a month, is unlikely to provide a significant boost to the Eurozone’s recovery. It expects the Eurozone to grow 1.5 per cent this year, the same as in 2015.

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