News

Mega Profits Declared By Banks Will End Soon— IMF

one dollar

The International Monetary Fund (IMF) has called on central banks and policymakers to encourage their banks to build resilience to future shocks saying the profits boom enjoyed by banks may shrink anytime soon.

The Washington-based lender said this in a fresh document published on its website, seen by NewsNGR.

The IMF said, “Any policy response to the surge in bank profitability must consider that the profits are likely temporary, largely a side effect of the rapid rise in monetary policy interest rates from negative levels where they stood for eight years up until mid-2022, and limited competition among European banks for deposits in a period of high levels of bank liquidity.

“Policymakers should encourage banks to build resilience to future shocks.

“With rapid hikes in monetary policy rates transmitting more slowly to banks deposit rates than their loan rates, European bank net interest margins picked up sharply in 2023.

“Combined with resilient asset quality, wider net interest margins supported record profits for European banks, helping them recover to levels last seen in the years preceding the Global Financial Crisis,” the IMF report said.

However, it warned that the abnormally high profits will start fading soon as interest income declines with lower policy rates, while higher impairment costs start weighing on profits.

“In the meantime, several structural factors that have weighed on the performance of European banks, such as low operational cost efficiency and limited adoption of digital technologies in the past two decades, have largely remained unaddressed and will continue being a drag on profits and capital once the boom in net interest margins dissipates,” IMF warned.

According to the IMF report almost 90 percent of the increase in net interest margins recorded in 2023 would fade due to relatively high short-term sovereign yields.