Europe’s Banks Warn of Lower Rates as Commerzbank, UniCredit Hit

(Bloomberg) -- Top European banks warned of weaker earnings as escalating trade tensions take a toll on their clients and the prospect of lower interest rates erodes their main source of income.

Commerzbank AG (DE:CBKG) said its goal of lifting profit this year is looking increasingly “ambitious” after revenue fell for a fourth quarter and it set aside more money for soured loans. UniCredit SpA slashed its full year revenue target by 1.1 billion euros ($1.2 billion), citing expectations that interest rates will stay lower for longer. Dutch lender ABN Amro added to the gloom, saying its margins are being hit.

Their warnings underscore how global trade tensions are rippling through the euro-zone’s export-driven economy, the world’s third largest. Many firms have refocused their businesses on lending to domestic clients in expectation that borrowing costs will rise after half a decade of negative rates in the region. With interest rates now set to go lower, any profits they make from increased lending are being squeezed.

Commerzbank Chief Executive Officer Martin Zielke has bet the future of the bank on adding new clients and boosting lending to companies and individuals. But the prospect of sustained low rates is making it increasingly difficult to earn enough money to finance investments in technology. The CEO earlier this year abandoned most of the bank’s 2020 financial targets and has signaled he remains open to mergers after talks with Deutsche Bank AG (DE:DBKGn) collapsed.

“Despite all the successes we have made, challenges continue to increase for the industry and for us,” Zielke said. “This might require further investments. And this is exactly what we are examining and assessing in our current strategy process.”

Shares Slump

Shares of all three banks declined in early trading, with Commerzbank slumping as much as 5.2%, ABN Amro falling 5.7% and UniCredit losing 3.6%.

Central bank cuts and rising trade tensions come just as Commerzbank and UniCredit prepare to update investors on strategy later this year, with Zielke indicating Wednesday that both dynamics will factor in its plans. Two weeks earlier Deutsche Bank had said the interest rate environment had already worsened since it finalized its latest turnaround plan.

Commerzbank, which started to pivot away from investment banking and toward lending shortly after Zielke became CEO three years ago, has been the subject of takeover speculation, though any talks have not proceeded beyond informal contacts, people familiar with the matter have said. Dutch lender ING Groep (AS:INGA) NV and Italy’s UniCredit have been named as potential buyers after the collapse of earlier merger talks with Deutsche Bank.

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UniCredit CEO Jean Pierre Mustier has focused on cutting costs and cleaning up the balance sheet to boost profit amid weak earnings from lending. He’s cut about 14,000 jobs since taking over about three years ago and may eliminate as many as 10,000 more under a new business plan to be outlined later this year, according to people with knowledge of the matter.

Lower for Longer

“With rates expected to be lower for much longer, we decided to adjust our 2019 revenue guidance,” Mustier said on Wednesday. The Italian lender lowered its 2019 sales goal to 18.7 billion euros from 19.8 billion euros previously, part of which was due to the sale of its stake in Finecobank SpA.

Barely finished cleaning up from their last recessions, central banks across the globe are swinging back toward rescue mode as the U.S.-China trade war nudges the world economy toward its first recession in a decade. Having cut rates a week ago for the first time since 2008, the Federal Reserve is on course to do so again next month.

The European Central Bank isn’t even close to finishing its last cleanup. President Mario Draghi has kept a key interest rate below zero for five years, effectively punishing banks and savers for holding deposits, rather than spending or investing them. He’s expected to loosen monetary policy again in September, after saying that the outlook is getting “worse and worse.”

Remedial Action

ABN Amro, too, signaled that ultra low interest rates in Europe are eating into margins, forcing it to take remedial action to shore up profit. While second quarter net income of 693 million euros ($777 million) beat estimates for 638 million euros, the Amsterdam-based bank said the impact of rates on deposit margins is prompting it to explore different revenue opportunities and focus on “strict cost discipline.”

Commerzbank in particular is exposed to trade tensions because of its extensive network of corporate clients, many of which rely on exports. German industrial production registered its biggest annual decline in almost a decade, a report showed Wednesday, highlighting the severity of the trade-inflicted manufacturing slump in Europe’s largest economy.

That’s hurting lending to the country’s many mid-sized corporations. Operating profit at the Commerzbank unit that caters to them slumped 90% from year earlier, to just 22 million euros, as higher provisions for bad loans offset an increase in income from lending. The bank said “single cases” in the second quarter were responsible for the hit, without providing details. The bank recently announced that it will replace division head Michael Reuther with former ING executive Roland Boekhout.

The business catering to individual clients and small businesses did better as it takes longer for individuals to feel the pain. The unit reported a 37% increase in operating profit and higher revenue.

Commerzbank’s net income also beat analysts’ estimates, but that was mainly because of lower taxes. The lender said it still expects a “slight” increase in profit this year, but that goal “has become significantly more ambitious.”

(Updates with context on central banks, economy from 11th paragraph.)