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Rising interest rates a ‘game changer’, says Santander’s Álvarez

Rising inflation expectations matter to the banking industry. Santander CEO José Antonio Álvarez explains, however, that negative real rates will probably persist for the next five or 10 years because of Covid.

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Rising inflation – and by extension higher interest rates – could propel a recovery in European banks’ financial performance in 2022, according to Banco Santander CEO José Antonio Álvarez.

“This a game changer in the industry, especially in Europe, where rates are negative,” he says, describing the prospect of higher interest rates in the UK and the US, as well as discussion about how the European Central Bank will react to higher inflation.

Official rates are already rising in Santander’s other core markets of Brazil, Mexico, and Poland, he notes. Meanwhile, more than half of Santander’s deposit book in Spain and Portugal is indexed to Euribor, meaning it is the prospect of a rise in official rates that matters, not if it happens.

“Whether I’m positive or very positive on the outlook for our industry depends on where rates go in 2022,” Álvarez says. “We run a €900 billion deposit book. With very low rates, revenues on that book were limited at best.”

Negative rates

Álvarez says ultra-low interest rates have been particularly punitive on banks with branches – their main purpose being to gather deposits and assets under management – because of their higher costs versus digital peers.