The stock markets have had a mixed start to the year, but there is one notable exception: Europe's banks.

The Stoxx bank index for banks from the monetary union has increased by around 10 percent since the beginning of the year, while the leading index for the euro area, the Euro Stoxx 50, has fallen by almost 4 percent.

There is one key reason for investors' confidence in bank stocks, which they have avoided for years: the turnaround in interest rates.

The hope for higher interest rates is linked to the expectation that the institutes will then achieve higher earnings again.

Markus Fruehauf

Editor in Business.

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The analysts at the rating agency S&P Global followed up this assessment in a study published on Thursday.

In their view, a one percentage point increase in the European Central Bank's (ECB) key interest rate could increase banks' annual net interest income by 7 to 10 percent.

In absolute figures, this corresponds to an additional income of at least 18 billion euros.

Retail banks geared towards classic customer business would benefit the most, including Commerzbank.

Their good figures and promised dividends caused the share price to rise by up to 6 percent on Thursday.

Since the beginning of the year, the bank's share has increased by a third, which should also please the major shareholder Bund with its stake of around 15 percent.

The S&P analysts point to the imponderables of their estimate.

In addition to the banks' business model, the additional interest income also depends on how steep the yield curve becomes.

Banks generate a large part of their interest income through maturity transformation.

This means the refinancing of long-term loans via short-term debt instruments.

Long-term rates tend to be higher than short-term rates, and the spread widens as the yield curve steepens.

No more losses with customer deposits

Deutsche Bank expects an increase in interest rates of one percentage point by 2025 to generate additional income of EUR 900 million compared to 2021.

In this scenario, the major Spanish bank Santander, which does a broad range of retail customer business, expects net interest income to be EUR 845 million higher in the current year.

Retail banks would also benefit from not making losses on customer deposits to which they do not pass on the ECB's negative deposit rate of minus 0.5 percent.

However, the S&P analysts do not see higher interest rates as a panacea for the problems of European banks.

Their low profitability also requires the transformation of business models and improvements in efficiency.

Finally, higher inflation could make cost control more difficult.

That would be the case if the employees tried to compensate for the loss of purchasing power with higher wages.