Record-low sovereign bond yields could cost European banks as much as 20% of their earnings over the coming years, UBS has warned.
The investment bank’s estimate is based on an assumption that a yield portfolio reinvestment is made at today’s rock-bottom rates, according to Jason Napier, UBS’ head of European banks research, FT reported.
Banks, which have already posted a dismal first quarter on the back of low interest rates and downbeat economic growth, will have “to attempt to claw back via volume growth, increased fees, cost-cutting and loan re-pricing.”
In detail, a 10% absolute cost reduction or as much as a 30 basis point (0.3 percentage point) increase in loan yields relative to back book rates is needed to offset the 20% decline in underlying sector earnings, Napier said.
In a note released Friday, he said: “With Southern European borrowers geared to short term rates we shouldn’t expect relief from higher policy rates soon. Investors need to engage with banks on what ‘stuck-here-forever’ interest income looks like and how strategy is set to cope.
“Media reports suggest that Tesla, Toyota, BMW, and other manufacturers will be selling autonomous cars in the next five or six years. European bond markets are saying that rate hikes will come later than this.”
A drop in bank shares helped push the Euro Stoxx bank index to its lowest since August 2012 on Thursday, following a dovish Federal Reserve statement and fresh Brexit polls suggesting a lead of the Leave camp ahead of next week’s UK referendum.
Government bond yields recovered slightly Friday, in line with stocks across the region, but they are still stuck at historically low levels. The yield on 10-year German Bunds is up two basis points, mildly back above zero, while the yield on 10-year Gilts in the UK is up 4 basis points at 1.14%.
Record-Shattering Binge
A week-long price rally in the US government debt market deepened Thursday as haven demand sent the yield on the benchmark 10-year note to the lowest level in nearly four years, Yahoo reported.
Government bond yields elsewhere continued their record-shattering binge, with the 10-year yields in Japan, the UK, Switzerland and Australia touching fresh record lows. Yields fall as bond prices rise.
Sentiment in the global markets has been jolted lately as investors are worried that the UK may leave the European Union. Volatility in stocks, bonds and currencies has been rising as the June 23 referendum draws near. Economists have warned that if the UK decides to leave the EU, it could rattle global markets and undermine the already fragile global growth outlook.
The yield on the benchmark 10-year US Treasury note settled at 1.56% Thursday, down from 1.59% on Wednesday. It was the yield’s lowest close level since Aug. 6, 2012.
