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.
(Bloomberg) — 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. OLB, another German bank, offers 3.65% if a client agrees to lock up the money for 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 Governor Andrew Bailey said of average rates on UK savings accounts in a hearing this month. “There may have well have been a transitional element as the interest rate regime changed. If it went on permanently then I think we would have big issues.”
The Bank of England 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 behavior 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 pay out 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 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?”
Read more: Bank of England Governor Signals Rate Hikes May Be Near an End
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 measures 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 British lenders: The movement of deposits from low- to high-interest-rate accounts is cutting their banking revenue by an average of £250 million ($312 million) 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.”
Read more: Britons Chasing Higher Rates Cost Banks £250 Million a Month
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 analyzing 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 IT systems that traditional lenders have to deal with. That’s allowed those so-called neobanks to move quickly to up their savings rates.
Take Atom Bank: the UK’s first app-based bank 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 license just last year, offers 4.35% for current accounts.
Even a banking stalwart like JPMorgan Chase & Co., which in recent years debuted a digital-only consumer offering in the UK, has been upping the ante by offering a 4.1% yield on its easy access savings account. In the US, where it operates thousands of branches, it offers 0.01% for its standard savings account.
Italy’s UniCredit SpA is offering 6.7% to some savers in Romania if they agree not to touch the money for 12 months. That’s well above the deposit rate of 6% set by the country’s central bank.
Headwinds for All
With its move this month, Santander said the 5.2% its offering is a “top of market” rate. The company has already warned the offering is only available until September 17 and it may withdraw it sooner if there’s high demand for the account.
Deutsche Kreditbank, a subsidiary of BayernLB, upped the rates it offers customers after deposits shrank by €4.8 billion ($5.16 billion) in the first six months of the year. Following the move, the bank said it started recording inflows again.
UniCredit, meanwhile, has been warning for months that higher interest rates will soon turn into a drag on profitability as the pass-through rate on deposits rises from 10% to 40% by year end.
“From the second quarter of this year we are going to have a reverse, where rates are going to go up less, but the so-called pass through is going to increase,” Chief Executive Officer Andrea Orcel told Bloomberg Television in June. “That will create a headwind for all banks.”
–With assistance from Katherine Griffiths, Philip Aldrick, Stephan Kahl, Sonia Sirletti and Irina Vilcu.
(Adds details about UniCredit’s offer in 16th paragraph)
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