UBS Becomes First Major European Bank to Flag Hit From Rate Cut
(Bloomberg) — UBS Group AG said the recent interest rate cut in Switzerland will hit lending income, making it the first big lender in Europe to warn that an almost two-year boost has finally turned into a headwind.
The Swiss National Bank’s decision in March to cut rates will likely cause net interest income — or essentially the difference between what banks earn on loans and pay for deposits — in the consumer and commercial banking division to drop, UBS said in an earnings report on Tuesday.
Many of Europe’s banks are bracing for a decline in what has been the biggest profitability driver for the industry over the past two years, allowing firms to step up investor payouts. As a result, many lenders have seen their share prices recently reach multi-year highs.
While many executives have previously warned that expected rate cuts would hit lending income, no major European central lender has yet implemented any. The European Central Bank is expected to start easing monetary policy in June.
“Although monetary easing is expected in the Eurozone, the US and Switzerland, the timing and magnitude of rate cuts by central banks are unclear, as inflation remains above their target range,” UBS said.
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Net interest income in UBS’s consumer and commercial banking division doubled in the first quarter from a year earlier, the lender said on Tuesday. However, it was up only 1% from the previous quarter.
Still, there would also be a positive effect on banks from rate cuts as it would support economic activity, UBS Chief Executive Officer Sergio Ermotti said in a Bloomberg TV interview.
A cut in global interest rates by 1 percentage point would probably cut net interest income by about $1.5 billion, UBS said in its report on Tuesday. Changes in the Swiss franc would account for about $900 million of the total, it said.
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–With assistance from Alessandro Speciale and Francine Lacqua.
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