Interest rates

European banks set to benefit from rising interest rates

This is an audio transcription of the FT press briefing podcast episode: European banks set to benefit from rising interest rates

Jesse Smith
Hello from the Financial Times. Today is Monday, July 25, and it’s your FT News Briefing.

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European banks start reporting earnings this week. American multinationals are feeling the pain of the strong dollar. And the FT’s Ben Hall spoke to Ukraine’s finance minister and gives us the highlights of that interview. I’m Jess Smith, replacing Marc Filippino, and here’s the news you need to start your day.

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This week, the US Federal Reserve is expected to raise its benchmark policy rate by three-quarters of a percentage point, just as it did last month. The Fed is struggling to calm inflation without plunging the US economy into a painful recession. These rate hikes also helped push the US dollar to its highest level in 20 years. And as the FT’s Kate Duguid reports, it wiped out billions of profits from corporate America.

Kate Duguid
We are talking about prima-companies, which have large companies overseas. So that often includes tech companies, but it can include pharmaceuticals, right? It includes IBM, Johnson & Johnson, Netflix, Philip Morris, the cigarette maker. And what happens is, you know, there are sort of two different translation effects. The first is that the strong dollar means that your international sales, which are made in the foreign currency, are worth nothing when you convert them to dollars. And then the second thing is also fair that because the dollar is stronger, it means that American products are more expensive than their rivals and their foreign rivals. There’s also this kind of side effect, that the United States has grown faster than a lot of these countries. And so the US economy, when, you know, we see it weakening a bit, is doing better than a lot of economies overseas. And so with weaker GDP elsewhere, businesses are suffering due to lower sales. And so that’s also part of the story of the strong dollar.

Jesse Smith
Kate Duguid is our US capital markets correspondent.

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Rising interest rates also affect banks. And how badly they have affected European lenders is something our banking editor Stephen Morris is monitoring this week. Major European banks will start publishing earnings reports.

stephen morris
Remember that these institutions rely on charging interest on what they lend to make money, and they have been suffering from extremely low, even negative, interest rates for the better part of a decade. after the financial crisis. So that’s really going to make a huge difference for banks with big balance sheets and with big lending books. They are going to see a big increase in their profits, which will be good news for their shareholders. However, whenever banks’ profits increase and the countries in which they operate are in dire financial straits, you tend to see calls for surtaxes on said profits or special levies. So there will be a lot of focus on exactly how much money these banks are making, but also the fear, the potential that governments choose to come in and take some of them out as well. So any comments on this will be very interesting to us.

Jesse Smith
Stephen, are there any banks you are particularly looking forward to hearing from? You know, boardroom dramas you’re hoping to learn more about?

stephen morris
One of the things we are blessed with as journalists covering European banks is that there are always sagas and issues. The bank we have focused on most recently is Credit Suisse. I’m not going to review the litany of scandals and missteps they’ve committed, but we’ll be looking to see if there’s any evidence of a recovery there. Now the other very interesting one from a geopolitical perspective is HSBC, which is headquartered in London but gets almost all of its money from Hong Kong and mainland China. Recently, its main shareholder with around 10%, the Chinese insurer Ping An, called for its dissolution. Now management disagrees with them and is strongly resisting them, but this is kind of the first time that Mark Tucker, the chairman, and Noel Quinn, the CEO, will be there facing reporters and analysts. And I expect the majority of questions for them to be about what you’re going to do with your biggest shareholder, tied as it is to the Chinese state, calling on you to split between eastern and western units ? I mean, it’s an existential threat to the bank. And this is the first time that we will really see leaders take care of that. So it will probably be the most interesting bank this quarter for us.

Jesse Smith
Stephen, I would also like to ask you about US banks. They just declared income. I wonder if the trends you’ve seen there give you an idea of ​​what’s to come with European banks?

stephen morris
One of the big stories there was the drop in investment banking revenues. Revenues, for example, by helping companies list M&A transactions. And in particular, there have been a number of losses on leveraged finance transactions, that is, the financing behind private equity takeovers. Now we expect to see broadly similar trends in European investment banks, we are talking about Barclays, Deutsche Bank, BNP Paribas, Credit Suisse and UBS. But it’s also interesting that US banks have hinted that hiring is being slowed or frozen and that there may be job cuts ahead. And of course, the most important number for investment banks are the bonuses. So we’ll be looking to see how badly all of these incredibly well-paid bankers are going to be affected by the market downturn and, indeed, if there are any indications of job cuts in investment banking.

Jesse Smith
Stephen Morris is the FT’s banking editor.

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Russia’s invasion of Ukraine destroyed the Ukrainian economy and its public finances. Kyiv took the dramatic step last week to ask international creditors for a pause in debt repayments. The Ukrainian official in charge of this and all aspects of the country’s finances is Sergii Marchenko. He is the finance minister of the country. FT Europe editor Ben Hall just spoke to him. Ben joins me now to talk about their conversation. Hi Ben.

Ben Room
Hi.

Jesse Smith
Ben, can you first give me an update on the war itself? Does either side have the upper hand?

Ben room
Well, I think it would probably be fair to say that Russia has the momentum for war in the two provinces, Donetsk and Lugansk, which make up the Donbass region in eastern Ukraine, which Vladimir Putin said he wanted to free Ukrainian control. . The Russian army is relentless. It took over pretty much the whole of Luhansk province a few weeks ago and continues now. But it’s very, very slow. They rely heavily on artillery to do the heavy lifting. And in the meantime, Ukraine has received new long-range rocket systems from the United States, and this is slowing down the Russian artillery machine a little. The war is therefore not at an impasse. It’s definitely moving. And Russia is moving towards its goal, but it takes a very long time.

Jesse Smith
I want to ask how Ukraine manages its finances as Russia continues its invasion. As I mentioned earlier, you recently spoke with the country’s finance minister, Sergii Marchenko. What did he tell you about the challenges he faces and how does he overcome them?

Ben Room
So he, Marchenko, is struggling with a massive deficit, 5 billion dollars a month, because of the collapse of the Ukrainian economy and therefore the collapse of its tax revenues. And he had relied on Western capitals to provide it, but they did not provide it in full. So he had to rely on the central bank’s money printing press. And he also had to rely on the central bank to sell his foreign exchange reserves to support the hryvnia. They sort of fixed the exchange rate to try to control inflation. And I think in the interview he kind of recognized that it was not sustainable and that the government had to act.

Serge Marchenko
It is natural to have tools that help us fill our gaps using internal borrowing by printing money through the National Bank of Ukraine. Of course, it is risky if it is very low, the loans under control, but if it is not the situation of control, it will create an inflation spiral.

Jesse Smith
So Ben, Marchenko says he’s worried about an inflationary spiral. What are some of the things he and his colleagues are doing?

Ben room
So they decided to reschedule their debts to save about $3 billion on interest payments and repayments. They devalued the currency to reduce the amount of foreign currency they have to burn to back the currency. And he also talked about the fact that eventually they will have to come up with some kind of spending cuts in order to reduce the deficit.

Jesse Smith
You mentioned Kyiv’s decision to suspend or request a suspension of payment of its external debt obligations. It was a U-turn for Ukraine. How important was that?

Ben Room
I think it was quite important precisely as you say, because it was quite a sharp reversal on the part of the Zelenskyy government. They had wanted to honor all of their obligations because they felt it was important to maintain market access and maintain international investor confidence. And I also think there was a kind of stigma that they wanted to avoid. I think they wanted to avoid being able to somehow allow the Russians to pretend that somehow, oh look, Ukraine is at fault. Ukraine is a failed state. So they were very reluctant to go that route, but they need to save all the money they can save right now. And by delaying interest payments and repayments, if this is finally accepted by all creditors, official and private, it should save them about $3 billion this year, which is a lot of money when they only have foreign exchange reserves of about $22 billion. And they go, and those reserves drop very, very sharply. And they have to keep them because they potentially have big expenses coming up.

Jesse Smith
Ben Hall is the FT’s Europe Editor. Thanks Ben.

Ben Room
Thanks.

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Jesse Smith
You can read more about all these stories on FT.com. This has been your daily press briefing on FT. Be sure to check back tomorrow for the latest trade news.

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