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European corporate deposits drop as negative rates bite

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Corporates pulled $37 billion of cash out of Europe’s four largest banks in Q4.

by Manpreet Singh

Published: 23 February 2021

The four largest European banks namely BNP Paribas, Barclays, Deutsche Bank and HSBC, have reported a $37 billion decline in corporate deposits in the final quarter of 2020. This is a reversal of the previous quarter in which they had increased their deposits by over $100 billion.

The quarterly decline is in contrast to the $74 billion increase disclosed by the largest US banks for the final quarter of 2020. The divergence may reflect the impact of negative deposit rates seen in the euro area, and the use of special liquidity funds by European corporates to boost returns.

The largest absolute drop in deposits was reported by Barclays whose corporate balances dropped by $28 billion, followed by BNP Paribas and Deutsche Bank with a $12 billion and $5 billion decrease respectively. However, HSBC reported an increase of $8 billion, driven by growth in Asia.

By the end of the year, Deutsche Bank, BNP Paribas, Barclays and HSBC held corporate deposits of $301 billion, $212 billion, $224 billion and $807 billion respectively.

Despite the Q4 decline, the banks ended the year with $208 billion more corporate deposits than a year earlier. In terms of percentage increase in deposits in 2020, BNP Paribas, Barclays and HSBC  managed to post a jump of 42%, 19% and 15% respectively while Deutsche Bank deposits were almost flat with a 1.2% increase.

Normally banks earn a margin from the difference between corporate deposit rates paid to clients and the interest received when they lend the money out. But negative bond yields and record low credit spreads mean that this margin has been compressed for European banks.

Barclays Group Finance Director Tushar Morzaria in Q4 2020 earnings call said that “Transaction banking income remained depressed at £344 million with further increases in deposits more than offset by margin compression”. The deposit bank posted a 19% increase QoQ however a decline of 11% in Q/Q terms.

On the lending front, the corporate loans dropped marginally by $3.4 billion in the fourth quarter. The collective lending stood at $973 billion of which Barclays, Deutsche Bank, BNP Paribas and HSBC hold $92.4 billion, $136.5 billion, $192 billion and $527 billion.

“The reported income of £186 million reflected limited demand for corporate lending with further paydown of revolving credit facilities”, said Tushar Morzaria, Group Finance Director at Barclays.

In the first quarter of 2020, corporates drew down loans in massive amounts, but over the successive quarters this trend reversed. In 2020, the lending at these banks increased by $21.4 billion from the end of 2019.

“Loans were flat year on year on a FX adjusted basis, while deposits were slightly lower, reflecting management actions to optimize the deposit base”, said James von Moltke, Chief Financial Officer at Deutsche Bank. Rather than grow deposits from account consolidation, Deutsche has deployed technology to allow clients to keep existing bank accounts while optimising cash balances.

BNP Paribas in its Q4 results highlighted that the bank has experienced ‘good resilience in cash management but weaker volumes in trade finance’. The French banking giant added that its corporate lending has seen a ‘normalisation in 2H20 after the crisis-related 1H20 peak’.

“If we zoom on business areas, in the early part of 2020 financing saw a strong drive. For instance, syndicated loans were exceptionally high with the same momentum carrying over into bond and equity markets as from the second quarter and through to year-end,” said Lars Machenil, Group Chief Financial Officer at BNP Paribas.

The major reason for decline in corporate lending is the fact that corporations have moved from bank lending to equity and debt markets for their capital needs. This is also seen in the case of the US corporates in Q4.

The investment banking fees at these European banks has increased by $182 million in the fourth quarter of 2020. Barclays bank saw an increase of 23% from the previous quarter while an 29% from the previous year. Collectively the investment banking fees for the year 2020 stood at $10.3 billion, an increase of 7% from 2019.

Notably, HSBC’s securities services revenue saw a dip of $235 million or 12% decline in 2020 as compared to 2019, the only bank to experience decline amongst these four European banks.

“Looking at market activities, they also saw a very strong level of activity on the back of solid demand from clients in an exceptional market context. This intense period of activity created an opportunity to strengthen client positions in all regions and to affirm European leadership in EMEA,” Machenil added.

Deutsche Bank’s Von Moltke mentioned that, “Equity origination revenues were significantly higher, driven by a strong performance in Special Purpose Acquisition Company activity”. While also adding that, “Advisory revenues were also significantly higher, driven by increased activity, mainly in EMEA”.

The rates in the Eurozone, Scandinavia and Switzerland have been in negative territory and are now close to zero in the UK, reflecting emergency central bank action during the pandemic. The corporations in the Eurozone have been getting negative yields when depositing money with the banks. During 2020, one-year deposit rates fell from 0.01% to minus 0.20%, according to the European Central Bank.