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European Banks Look to Fee Income as Rate Hikes Slow

ECB, European Central Bank

European banks are investing more in fee-generating operations while waiting for interest rates to fall.

The European Central Bank is slowing the pace of interest rate hikes, leading to greater competition for deposits and forcing lenders to increase what they pay to entice savers, Bloomberg reported Thursday (Nov. 9).

Increasing fee revenues will be “a focus point of our growth initiative” for the next several years, Bettina Orlopp, finance chief at Germany’s Commerzbank, said in the report, adding that the bank is focusing on growing its asset and wealth management business.

The bank projects an 18% increase in fee income over the next four years, while net interest income will grow at a rate of under 4%, per the report.

Several European banks are following the same path, using their recent earnings presentations to let investors know they’re spending on aspects of their business that don’t rely on lending revenue — insurance, private banking and payments, for example — as they expect interest income to peak, according to the report.

It will be difficult for banks to generate enough fee income to balance the drop in interest income, the report said, because many of the business lines banks use for fees — such as asset management — are themselves under strain in a murky macroeconomic environment.

Fee income also makes up a much smaller slice of the revenue pie than lending income, meaning banks would need major growth rates to catch up, according to the report.

Meanwhile, large lenders in the U.S. have been telling investors they’ll need to offer depositors higher rates.

Wells Fargo, Citigroup and J.P. Morgan Chase all reported increases in their lending business last week, with J.P. Morgan and Wells Fargo both raising their outlooks for the year in terms of lending income.

J.P. Morgan Chief Financial Officer Jeremy Barnum noted last month that there has been “upward pressure” on deposit rates due to the “competitive market environment.”

And Wells Fargo Chief Financial Officer Michael Santomassimo said his bank has been “pleasantly surprised” that competitive pressure to hike interest rates for deposits had not moved as fast as expected but warned that “at some point, it will.”