European banks, including Deutsche Bank AG (NYSE: NYSE:DB) and ING Groep (AS:INGA) NV (NYSE: ING), may face a revenue loss of up to €66 billion ($70 billion) if the European Central Bank (ECB) decides to increase the reserves these institutions are required to hold at the bank, according to Bloomberg News calculations. UBS Group AG (SIX:UBSG) research estimates suggest that Deutsche Bank and ING would be amongst those most impacted.
According to InvestingPro data, Deutsche Bank has a market cap of $20.65 billion USD and ING Groep NV has a market cap of $45.06 billion USD. Both banks have shown significant revenue growth, with Deutsche Bank at 8.7% and ING Groep NV at -15.0%. The P/E ratios for both banks are low, with Deutsche Bank at 4.14 and ING Groep NV at 5.7, indicating that the stocks may be undervalued.
This potential move follows an ECB decision in July to eliminate interest on the €165.3 billion that euro area banks are currently required to keep at the ECB, equivalent to 1% of their most common forms of deposits. This decision resulted in a loss of about €6.6 billion in annual payments for affected banks. The proposed increase in the minimum reserve requirement is expected within the next year, with most economists predicting a 1 percentage point rise. Austrian Central Bank Governor Robert Holzmann has suggested a more drastic increase, proposing it be raised to 10%.
UBS researchers estimate that each percentage point increase in the minimum reserve requirement would reduce banks’ annual earnings by an average of 2%. Deutsche Bank has already warned that it could lose about €200 million from the elimination of interest on its minimum reserves at the ECB under current rules. Interestingly, InvestingPro Tips for Deutsche Bank highlights that the company has been experiencing accelerating revenue growth and consistently increasing earnings per share, yet it suffers from weak gross profit margins.
This potential measure could escalate tensions between the ECB and regional banks, which have been protesting against what they perceive as intrusive supervisory practices and high regulatory burdens. The measure could also amplify the effects of special bank taxes imposed by regional governments, a move previously criticized by the ECB as it depresses share prices. Commerzbank AG (OTC:CRZBY)'s CFO, Bettina Orlopp, referred to the ECB discussions as "crazy."
Advocates for higher reserve requirements argue they would tighten monetary policy by reducing liquidity in the banking industry. Some members of the Governing Council believe this could decrease losses at central banks by cutting into banks’ voluntary deposits at the ECB, which currently earn interest. However, bankers view this as a tax on deposits.
As Europe’s top banks prepare to report Q3 earnings next week, analysts predict a 19% increase in net interest income, reaching nearly €163 billion this year. This figure is expected to stagnate by 2024. The ECB's decision on whether and how much to raise reserve requirements remains divided, suggesting lenders may experience a smaller hit than anticipated or potentially none at all.
ING Groep NV, as per InvestingPro Tips, has raised its dividend for 3 consecutive years but is quickly burning through cash. This could be a concern if the ECB decides to raise reserve requirements. For more insights and tips like these, visit InvestingPro.
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