After a long stretch through what felt like an eight-year desert of near-zero and negative official rates, Banks finally reached an unexpected turning point. Not an oasis, perhaps, but something closer to a thriving forest promising better growth. One of the top executives at a major firm captured the sentiment this way: it’s as if the Low Blows song is reversed—good times for banking, at last.
This shift came as central banks started lifting money prices to fight inflation. The move is sending a wave of fresh air through the financial sector, even as it squeezes borrowers a bit more. To maximize impact, some institutions are pursuing a strategy that relies on quick, assertive actions, sometimes described as a rocket-and-explosion approach to funding and lending.
The dynamics are well understood: when money becomes dearer, loan pricing rises sharply while the price of money for deposits may lag, creating a temporary lag between the costs borne by banks and the yields they fetch from borrowers. As money costs rise, lenders experience the first real uptick in interest charges on new deposits and new loans, a shift that marks the return of a traditional cycle after years of stagnation.
win every week
Executives from several large banks have signaled that it is indeed possible to pass along rising funding costs to customers who borrow or hold deposits. As deposit rates begin to move, the immediate effect is often a disconnect between what savers are paid and the higher rates charged on loans. Floating-rate housing loans have climbed more rapidly since January, driven by the movement in Euribor, the rate banks charge each other for interbank lending and a good predictor of central-bank policy tendencies.
At the same time, new fixed-rate mortgages have seen growth, given their link to the yield on the 10-year Treasury note, which climbed from around 0.7% to 2.4% since April. Banks have also benefited from Euribor fluctuations, sometimes allowing lenders to narrow spreads on variable-rate loans in exchange for other commercial gains. The overall picture suggests that variable-rate products may become more profitable for lenders in the years ahead, even if they come with higher monthly payments for borrowers.
Banks justify this recalibration as a necessary correction after years of suppressed profitability due to ultra-low or negative official rates. The logic is straightforward: the cost of keeping money with the European Central Bank has risen modestly, and credit remains relatively accessible compared with the pre-crisis era. Banks argue that restoring profitability is essential to sustain long-term lending to households and firms.
increased profitability
While the industry’s profits had been under pressure for an extended period, the recent trend points to stronger earnings in the wake of 2021. Extraordinary provisions and one-off adjustments in 2020 helped cushion pandemic-related losses, and the Spanish banking system reported a marked improvement in 2021. Net figures show a pronounced rebound in return on equity (ROE, a key profitability metric) from negative territory to solid gains. With the Bank of Spain noting the rebound, ROE turned higher as banks benefited from mergers and other positive forces that year.
Even without the one-off effects, ROE rose from modest levels to more robust figures through 2021 and into the following year. In the early months of the current year, profitability continued to improve, while the cost of capital showed a downward trend. For investors, these dynamics suggest a more favorable environment for lending and balance-sheet optimization, a view echoed by central-bank observers who track the sector’s capital efficiency and risk management.
In sum, the banking sector appears to be transitioning from a prolonged period of suppressed earnings to a phase where rising interest rates align with higher loan yields. This shift supports increased profitability for lenders, even as deposit pricing and consumer loan costs adjust in response to policy moves and market expectations. The trajectory remains subject to macroeconomic developments, including inflation trends, energy prices, and global growth, but the early signs point to a sector regaining momentum after years of financial strain.