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The "honeymoon period" for banks' profitability ends

Bank profitability will reach record levels in 2023, but is expected to follow a downturn, a trend that will be reinforced after the reduction of interest rates from mid-2024. Interest expenses tripled in 9 months.

A weakening of banks' profitability is expected in the new year, a trend that is expected to be reinforced by the gradual reduction of interest rates expected from mid-2024.

The year ends with an impressively strong performance for domestic banks, with profitability reaching record levels as a result of the extremely favourable interest rate environment.

The sharp rise in interest rates by the ECB led to a jump in banks' interest income as they benefited from the almost immediate pass-through of the increases to borrowers. At the same time, they were able to pass on the increases to a lesser extent to depositors due to the excess liquidity in the system and the structure of deposits with the absolute dominance of demand deposits. 

The limited deposits and the small size of the average deposit makes it meaningless for depositors to seek better returns through time deposits. Thus the bulk of deposits remain demand deposits, the interest rate on which is very low.

However, despite this policy, the increase in interest rates, albeit with a delay, is gradually being passed on to depositors. It is characteristic that in the nine-month period January - September, according to the Bank of Greece data, the interest income of banks increased by +96.5%, while interest expenses amounted to 4.07 billion euros, an increase of +211.30%.

Thus the final picture of banks' profits for the nine months is a modest +4.6%, far from the impressive +96.5% of interest income.

Bank executives estimate that bank profits will peak in this year, a performance largely due to the positive interest rate environment, and will gradually decline in the following years, while remaining at high levels.

They note that pressure on interest expenses will intensify while the gradual decline in interest rates, which most expect after the first half of 2024, will lead to a decline in interest income.

Moreover, despite claims to the contrary, in business lending, where the largest credit growth is recorded, there is fierce competition among commercial banks, competition that is driving down interest rate margins.

Despite the expected decline in bank profitability from the highs of 2023, the overall picture for profitability in the sector will remain very satisfactory. Moreover, profitability is expected to increase further as large banks continue to cut costs and shrink their branch network.

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