European Banks: Why following the data is important to understand the outlook for European Banks. 

As well as providing fundamental Bank Equity research, Carraighill also focuses on understanding the environment within which companies operate. Part of this involves dissecting large quantities of data into insightful understanding and trends. The trend can often be your friend. It also helps us focus on turning points. 

For the European banks, the ECB provides us with a significant level of detail from which we can understand the key drivers of net interest income (apart from the outlook for European interest rates).  

So, what is the data telling us? 

  1. The customer spread (Carraighill estimate) is rising in all European countries reviewed. This is the difference between what banks charge on their loans less what is paid on deposit balances. When it is rising, it is very bullish for European banks’ net interest income (NII). For example, it is now +30.9% in Portugal (from +24.9% in August) and +19.6% in Austria (from 15.2% in August). 

Chart 1 (Portugal): Customer Spread 


  1. Loan demand has softened slightly in September but remains strong. Austria, Belgium, and Germany stood out with particularly strong loan growth. NFC lending was the primary driver of this growth in the two German-speaking countries. A growing balance sheet is positive for European banks’ revenue. 
  1. Huge increases to front book rates. The interest rate charged on new loan rates jumped in all countries by roughly 25bps. The increase was most pronounced in Spain, which saw an increase of 40bps.

Chart 2 (Germany): New lending rates are now above the back book rate 


  1. Back book loan rates are also increasing in all countries (roughly +10bps in each country). The front-back book loan rate differential is now positive in all European Bank geographies. Germany has reached a new high of +73bps. This is important as it will drive higher incremental interest income on new loans.
  2. Balance sheets continue to rise. Companies generally assume static balance sheets when they provide interest rate sensitivity assumptions. This is not the case in Europe, with banking assets rising YoY between +2.5% in Italy to +18.6% in Germany. In time, this will provide further NII upside. 
  1. The front-back book sovereign yield differential is surging higher (over 50bps increases in August alone in some countries). This is a very positive reinvestment opportunity for European Banks that purchase bonds as they mature. We believe many European banks can increase their ALCO positions further (many were unwilling to grow their books during the period of negative interest rates).
  2. Germany’s yield curve has inverted and is starting to invert in the other main European economies.Sovereign credit spreads also remain contained. Italy, which has the highest spread, has yet to rise past the highs last seen during its 2018 government crisis. The new Government is restrained by high debt and the terms of the NextGenerationEU fund.  

Chart 3 (Italy): Sovereign Front book Rates compared to back book 

In overall terms, the outlook for the top line appears bright. However, as the data changes, we are always willing to change our minds. Therefore, it is important to understand the evolution of this data on European Banks and how it changes month on month. 

Regular Carraighill European banks offering:  

  • European Banks Analysis: Our latest thoughts and fundamental forecasts   
  • Eurozone Banking System: Top-line Drivers  
  • UK Banking System: Top-line Drivers  
  • European Asset Management: Revenue Drivers  
  • Global Inflation and Rates  
  • Food, Energy, and Rates   
  • ECB: Regular updates on ECB policy  
  • Ad hoc updates – Examples include research on gas, bond exposures, rising net worth, and insights from other sectors we follow.  

If you would like to access our work, Carraighill Research Access enables you to access these and other thematic and sectoral research through our secure online portal. If you would like to speak to a partner or analyst on the topics raised in this piece, you can contact us here.