While banks have been quick to slap borrowers with higher interest rates, they’ve been slower to pass on the benefit of those increases to savers. — Reuters
LONDON: A bevy of European banks have finally begun to pass higher interest rates to savers, moves that will pinch profits but should help allay criticism from regulators and lawmakers alike.
Banco Santander SA recently debuted an account that, for now, gives UK customers 5.2% interest.
Germany’s Deutsche Kreditbank AG recently upped the rate it offers to 3.5% to reverse a decline in deposits. Italy’s UniCredit SpA is offering 6.7% to some savers in southeastern Europe who lock up their money with the bank for at least a year.
Taken together, the moves have helped push up the average yield on checking accounts in markets across Europe.
“The rate is increasing, and I’m not surprised, and I think there were very good reasons why it should increase,” Bank of England (BoE) governor Andrew Bailey said of average rates on UK savings accounts in a hearing this month.
“There may have well been a transitional element as the interest rate regime changed.
“If it went on permanently, then I think we would have big issues.”
The BoE and its counterparts across Europe have aggressively raised rates in recent years as they sought to dampen inflation levels that have engulfed the region. While banks have been quick to slap borrowers with higher interest rates, they’ve been slower to pass on the benefit of those increases to savers.
That’s sparked criticism from lawmakers and regulators, who have argued that the behaviour is intended to beef up profits.
Indeed, European banks’ net interest margins, a key measure of profitability that shows the difference between the interest banks collect on loans and payout in deposits, soared to the highest level in at least 10 years in the second quarter, according to data compiled by Bloomberg Intelligence.
“Clearly there is going to be some margin there for the banks, but this seems excessive,” James Duddridge, a Conservative member of the UK parliament, said in the hearing.
“Do we think that is acceptable? What are the impacts of that? And not just for consumers. Let’s face it, why bother saving at those interest rates?”
UK banks have been moving the fastest to reprice their deposit offerings, according to Jonathan Pierce, a banking analyst at Numis Corp Plc.
Their deposit betas, which measure the share of rate hikes that banks pass along to savers, have risen to 44%, while the average for their counterparts across Europe has only increased to 25%, Pierce found.
That has come at a cost for UK lenders. The movement of deposits from low to high-interest rate accounts is cutting their banking revenue by an average of £250mil (US$312mil) a month.
“Of course, what you’ll continue to see is customers shifting deposits out of lower-rate sight deposit accounts into higher-rate time deposit accounts,” Pierce said.
“That will increase the overall deposit costs of the banks.”
The moves come after prodding by the UK’s Financial Conduct Authority, which announced in July it would take “robust action” against firms that don’t transfer the benefits of higher rates onto consumers.
The agency has since fielded reports from nine of the country’s largest financial firms about the rates they offer on deposit accounts, and it’s now analysing the data provided.
“Since this plan was published, we have seen the greater availability of higher interest rates in both term-limited and easy-access accounts,” the agency said in a statement.
“We welcome the development of a more competitive market.”
European lenders have long faced intense competition from online-only rivals, which don’t have to shoulder the legacy costs tied to branches and old information technology systems that traditional lenders have to deal with.
That’s allowed those so-called neobanks to move quickly to raise their savings rates.
Take Atom Bank, the UK’s first app-based bank, which is now offering savers one of the best yields for one-year fixed-term savings accounts at 5.9%.
Another mobile bank, Kroo, which landed a full banking licence just last year, offers 4.35% for current accounts.
Even a banking stalwart like JPMorgan Chase and Co, which in recent years debuted a digital-only consumer offering in the United Kingdom, has been upping the ante by offering a 4.1% yield on its easy-access savings account.
In the United States, where it operates thousands of branches, it offers 0.01% for its standard savings account. — Bloomberg
