Bank results highlight boost from higher interest rates

Today’s top stories

• The main UN agency bringing humanitarian aid to Gaza said it was about to run out of fuel, threatening its ability to help roughly 1mn people displaced by the war in the besieged enclave. Read our full coverage of the Israel-Hamas war.

• Shares in France’s Worldline, one of the world’s largest payment specialists, fell more than 50 per cent after it warned that revenues and margins would take a hit this year from a deteriorating economic outlook.

• There was more tumult in the electric vehicle industry as Porsche hit out at the EU’s probe into Chinese EV subsidies, while South Korean battery maker LG Energy Solution echoed Tesla chief Elon Musk by warning of the hit to EV sales from high interest rates.

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Good evening.

High interest rates are boosting profits at banks across Europe while bankers in the UK can look forward a different kind of boost: a cap on their bonuses is being thrown out.

Deutsche Bank today forecast its highest annual revenues for seven years with plans to increase dividends and share buybacks over the next two years. Third-quarter pre-tax profit at Germany’s largest lender rose 7 per cent to €1.7bn.

Santander, Spain’s largest lender, reported an increase in net profit of 20 per cent, to €2.9bn. In what is likely to be a common theme in this year’s reporting season, net interest income — the difference between the money lenders make on loans and pay out on deposits — rose 16 per cent.

The outlook for Spanish banks, however, was somewhat clouded yesterday by news that Yolanda Díaz, who leads the leftwing Sumar coalition, would push for an extension of the country’s windfall tax on banks and energy companies. The move is part of negotiations to support acting prime minister Pedro Sánchez’s socialist party.

Windfall tax worries have also come to the fore in Italy, where UniCredit, the country’s second-largest bank, said yesterday it would set aside €1.1bn as “non-distributable reserves” for 2024 instead of paying the one-off tax, in a move analysts said might set a trend for other lenders. The bank reported a 36 per cent jump in net profit to €2.3bn and upgraded its net revenue forecast.

Rising profits from higher interest rates had prompted Italy’s rightwing government to announce the windfall tax in August but the measures have been watered down several times following an investor backlash.

In the UK, Lloyds — the nation’s biggest lender and seen as a bellwether for the economy — also beat forecasts, reporting third-quarter statutory profit before tax of £1.9bn, helped by a drop in defaults as well as the high rates environment. It did, however, warn that some of the benefits of higher rates were starting to wane.

Barclays has so far proved to be the main exception to the optimistic tone of the earnings season. Its shares fell yesterday after it reported a 16 per cent fall in profits to £1.3bn and a gloomy outlook with “material” cost cuts to come as part of a strategic review concluding early next year.

On the plus side, Barclays bankers, along with the rest of their UK peers, could benefit from bigger rewards after regulators yesterday scrapped the cap on bonuses that was inherited from the EU as part of the post-Brexit drive to boost the City of London.

Then-chancellor Kwasi Kwarteng had first announced the UK’s intention to abolish the measure as part of his ill-fated “mini” Budget a year ago. The rule had limited bonuses to twice base pay for employees of banks, building societies and investment firms with the aim of discouraging them from excessive risk taking.

Although the move has been slammed by opposition politicians as tone deaf during a protracted cost of living crisis, its supporters say bonus caps tend to push base salaries higher and its scrapping will help bring down the fixed costs of employing a banker in London as opposed to (for example) New York.

Others, such as our Due Diligence newsletter (for Premium subscribers), argue the bonus cap never made sense to begin with.

Need to know: UK and Europe economy

One year ago, Rishi Sunak became Tory leader and the UK’s new prime minister, promising “economic stability and confidence” after the chaos of Liz Truss and Boris Johnson. Here’s our assessment of how he’s performed over the 12 month-period.

New PMI survey data showed UK business activity shrinking for the third month in a row under the impact of high interest rates and falling exports.

The UK also faces months of uncertainty about the state of its jobs market after analysts warned that new “experimental” figures (showing a slight upturn in unemployment to 4.2 per cent) were deeply flawed. Commentator Chris Giles says the “official” data is becoming a nonsense.

UK public authorities and lenders are clashing over hospitals and schools as Britain’s decades-long experiment with the private finance initiative comes to an end. PFI was launched in the early 1990s to let the public sector build through borrowing from banks and other investors, which would then maintain the assets over decades.

The European Central Bank is set to pause its programme of interest rate rises tomorrow following recent disappointing eurozone data including yesterday’s PMI survey that showed business activity retreating more than expected. A Big Read details how Germany’s once prosperous industrial districts are suffering.

Need to know: Global economy

The International Energy Agency expects demand for oil to fall by almost half by 2050 if governments follow through on green pledges.

Chris Giles rails against an epidemic of rigid or sloppy thinking from central banks in his new newsletter. Here (for Premium subscribers) are his top 10 inflation crimes and misdemeanours.

Chief economics commentator Martin Wolf says politics is the biggest threat to China’s economic growth as it grapples with the relationship between communism and capitalism. Columnist Edward Luce praises US president Joe Biden for soothing tensions between Washington and Beijing.

Watch: Al Gore, the former US vice-president, tells the FT’s Moral Money Summit why he thinks this year’s COP28 climate change talks in the United Arab Emirates look likely to fail, and what it will take for the world to halt the rise in global temperatures.

Need to know: business

Carnival, the world’s biggest cruise company, was ordered by an Australian judge to cover the medical expenses of a passenger who contracted Covid-19 on one of its ships to compensate for its “negligent” handling of the outbreak in a landmark class action ruling.

The global slowdown in luxury spending hit Kering’s Gucci and Saint Laurent brands as well as Hermès, maker of Birkin bags. The latter did however defy an industry-wide trend for slower sales in the US — luxury’s biggest market — and Europe.

Apple is facing scrutiny from environmental campaigners over its claims that its latest devices are “carbon neutral”, a term the EU proposes to ban as part of a new offensive against “greenwashing”.

Apple is one of the “magnificent seven” tech giants that have driven all of the gains in global stocks this year, underlining US dominance of equity markets. Microsoft is another: listen to the new Behind the Money podcast on how it went from combative villain to a conciliatory giant in the eyes of regulators and governments.

Ukraine is trying to build up its own arms industry, a difficult task at a time of worldwide shortages of key components and minerals, including gunpowder.

A new Big Read takes you inside the blockbuster trial against former crypto darling Sam Bankman-Fried. Cryptocurrencies are back in the spotlight after the US Treasury said they were being used to raise funds by Hamas.

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Some good news

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