European Banks Feel the Pinch From Draghi’s Negative Rates

A drop in net interest income, the first in two years, may worsen after the ECB lowered its deposit rate to minus 0.4 percent in March, meaning it’s charging lenders more to hold their excess cash. The central bank’s next rate decision will be announced on Thursday, and economists predict policy will remain unchanged.

“In the banking world, we are currently struggling with negative interest rates,” said John Cryan, Deutsche Bank AG’s chief executive officer, at a conference in New York on Tuesday. “We will struggle more as the effect of those negative interest rates plays out into our deposit books.”

“The interest-rate environment comes at a bad time,” said Dieter Hein, an analyst at Fairesearch-Alphavalue. “Banks face a lot that is weighing on them at the moment, with higher regulatory costs, capital requirements, levies and in some cases litigation.”

Commerzbank AG, Germany’s second-biggest bank, blamed negative rates for cutting revenue by about 90 million euros at its corporate- and consumer-banking divisions in the quarter.

The German lender will probably be “one of the biggest losers from low rates,” said Morgan Stanley analysts, including Huw Van Steenis, in a note Wednesday. “We expect negative rates to keep dragging, with mitigating actions not showing any effect” before 2017 or 2018, they wrote.

As old loans mature or are refinanced, euro-zone banks will be left with an increasing stock of newer loans made at lower interest rates. Those may prove less profitable if the bank’s funding costs don’t decline as well.

ECB Vice President Vitor Constancio, speaking to Bloomberg Television last week, said that while negative rates over time may hurt bank profitability, the net effect of the central bank’s stimulus programs has benefited lenders by boosting the price of assets, reducing bad loans and sparking an economic recovery.

Since the ECB first cut the deposit rate below zero in June 2014, the cost of insuring European financial firms against default has doubled. Yet even some bankers see little alternative to the ECB’s drastic measures.