Key takeaways
1. Robust growth in fee income
Fee income surged by 15%,2 driving the bulk of the sector’s revenue growth. Banks with significant investment banking operations reaped the benefits of a recovering deal-making environment. This positive trend mirrors the results seen in US banks, where leaders expressed optimism about future growth, despite M&A volumes still lagging behind their 10-year averages.
Wealth management revenues also grew as clients shifted deposits into investment products amid declining rates and rising equity markets. Banking leaders emphasized the positive structural trends in this segment and reiterated their focus on expanding this capital-light revenue stream.
2. Slowdown in net interest income gains
The interest rate cycle has reached an inflection point, resulting in a predicted slowdown in net interest income growth. Previously, rising interest rates enabled banks to reprice their loan books more swiftly than their deposits, boosting both net interest margins and net interest income. However, as central banks lower interest rates, these dynamics are reversing.
To mitigate the adverse effects of falling rates, banks have strategically increased the proportion of assets that lock in the current high interest rates for several years. In markets such as the UK, these bond portfolios account for up to a third of banks’ net interest income, a share that is likely to increase. Additionally, lower rates are expected to stimulate loan demand, which has been suppressed by rising rates, thereby providing an additional tailwind to income. US banks have indicated this shift, while banks in Spain and the UK have already observed this trend in the third quarter.
3. Positive operating leverage
Over the past two years, banks have successfully offset inflationary pressures through stringent cost discipline and efficiency savings. In the third quarter, cost growth lagged revenue growth by 5 percentage points, enabling banks to generate positive leverage. While inflation has fallen, banks must balance efficiency with essential investments in technology infrastructure, data management and controls.
4. No signs of stress in loan books
A consistent surprise in quarterly earnings has been the remarkably low level of loan losses, with the latest results season again showing resilience across banks’ loan books. Even in the most affected sectors such as commercial real estate, which has seen a material drop in demand as work and shopping behaviors have changed, both US3 and European banks reported no new signs of stress.
These trends reflect banks’ efforts to actively identify and address any potential deterioration in credit quality, as economic growth has slowed. This proactive approach has been enhanced by improvements in risk management capabilities. Investments in analytics have given banks deeper insights into their customer base and equipped customers with tools to better manage their financial health.
