UK banks lead global rivals in passing interest rate benefits to savers

UK banks have passed on more of the benefit of interest rate hikes to savers than their counterparts in Europe or the US, as politicians, regulators and customers press for a greater share.

Global banks are coming under pressure to pass on the benefits of higher interest rates to their customers, according to an analysis by ratings agency S&P – but lenders in less competitive markets have proved much less generous than others.

“After years of extremely low profitability associated with extremely low rates, banks now have a chance to recover some of their levels of profitability prior to the global financial crisis,” said Marco Nicolai, an analyst at Jefferies. “They’re not inclined to give it up right away.”

The rapid hike in interest rates by central bankers over the past 18 months to combat the threat of inflation has been a boon for banks, which profit from the difference between the rate they pay to depositors and the one they charge borrowers, known as net interest income.

Analysts expect net interest income for European banks to peak in the third quarter of this year.

But while banks argue that healthy margins are a return to normal business conditions after record low and even negative interest rates, they have faced pressure to share more of the bounty with their customers.

Comparing markets based on how banks incorporate the share of policy rate increases into interest rates on deposits – a metric known as deposit beta – shows that customers in countries that started raising rates sooner have by far benefited the most.

In the UK, the Bank of England is set to raise rates in December 2021, one of the first major central banks to do so. Since then, it has raised its policy rate by 0.1 percent to 5 percent, with investors predicting a rise to 6.5 percent by next March, the highest level since 1998.

Meanwhile, Britain’s biggest banks have offered their customers 43 per cent returns on higher deposits.

“Not only is the UK seven months ahead of the eurozone in the cycle, but there is also a high degree of competition, especially with non-banks,” explained Nicholas Charney, an analyst at S&P Global Ratings, explaining why the UK’s deposit beta was the highest in Europe.

But as Britain grapples with rising inflation and rising mortgage rates, politicians, regulators and the Bank of England have called on banks to raise deposit rates for savers even higher.

The main problem in the UK is that fixed term mortgage rates are linked to swap rates, which have risen much faster than the BoE policy rate.

Citi analyst Andrew Combs said, “Politicians don’t want to see that mortgage rates are so high compared to savings rates.”

Meanwhile, as US banks expect the Fed to hike interest rates by 25 percent from March 2022 until April this year, deposit betas have “increased materially” since then, S&P analysts estimate.

Still, corporate and institutional customers have called on US lenders to raise their deposit rates further.

American lenders are under more pressure than European counterparts to pass on the benefit of rising rates to their customers because of competition within the market, not only among banks but also because of the different savings products offered.

According to Citi, unlike European banks, which have generally seen modest inflows into deposit accounts in the past year, US banks have faced 5 percent outflows over the same period.

“The biggest difference between European and American banks is the flight of money markets in the US, where it is much easier to move money from a bank account into a money market product or even buy Treasuries,” Combs said.

“The ease of movement is part of the dynamic that explains why American banks are willing to offer higher deposit rates.”

Across the eurozone, where the European Central Bank is set to raise rates in July 2022, banks have been slow to pass on benefits to their customers. The average deposit beta for large eurozone banks in the nine months to April this year was 18 per cent, compared with 36 per cent in the first nine months of the previous period of steadily rising rates in 2005-8.

Analysts said one of the main reasons for the delay is the pace with which policy rates have been raised this time as compared to 2005.

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French lenders have been most willing to share the growth with customers. A major factor in this is the popularity of the livrette à, a 200-year-old savings account designed to help restore France’s public finances after Napoleon Bonaparte’s wars.

Leverate A deposit accounts are linked to inflation and set by the government. At 3 percent, rates on the account are at their highest in 14 years.

Luxembourg banks have the highest level of deposit beta across the eurozone at 36 percent, but a quarter of this is due to customers switching from current accounts to fixed-term accounts, which offer higher rates in return for locking up their money for a year or more.

Countries such as the UK, Spain, Italy and Ireland have very low rates of migration to high-earning accounts as savers prefer quick access to savings while facing rising costs.

Countries most affected by the eurozone crisis more than a decade ago – such as Ireland, Spain, Greece and Italy – where the region was forced to consolidate – have also proved much less willing to pass on policy rates to customers.

“If you have fewer banks in the system, they control the market and they can more effectively control how much is transferred to consumers.” S&P’s Charne said.

The pass-through rate of Spanish banks is one of the lowest in Europe, despite the socialist-led coalition government imposing a controversial windfall tax this year aimed at affecting banks that have benefited most from a rise in net interest income.

Charney said, “I’m not sure how effective the windfall tax was in motivating banks to raise deposit rates – it doesn’t address the main factor, which is the level of competition in the market.”

Citi estimates deposit beta across the eurozone will rise from an average of 25-30 percent this year to 30-40 percent next year, while US banks will rise to 45-55 percent by the end of this year.

“Ultimately it depends on how much political pressure banks are willing to bear compared to the profits they are making after years of low or negative rates,” said a European Bank official.

UK banks have passed on more of the benefit of interest rate hikes to savers than their counterparts in Europe or the US, as politicians, regulators and customers press for a greater share.

Global banks are coming under pressure to pass on the benefits of higher interest rates to their customers, according to an analysis by ratings agency S&P – but lenders in less competitive markets have proved much less generous than others.

“After years of extremely low profitability associated with extremely low rates, banks now have a chance to recover some of their levels of profitability prior to the global financial crisis,” said Marco Nicolai, an analyst at Jefferies. “They’re not inclined to give it up right away.”

The rapid hike in interest rates by central bankers over the past 18 months to combat the threat of inflation has been a boon for banks, which profit from the difference between the rate they pay to depositors and the one they charge borrowers, known as net interest income.

Analysts expect net interest income for European banks to peak in the third quarter of this year.

But while banks argue that healthy margins are a return to normal business conditions after record low and even negative interest rates, they have faced pressure to share more of the bounty with their customers.

Comparing markets based on how banks incorporate the share of policy rate increases into interest rates on deposits – a metric known as deposit beta – shows that customers in countries that started raising rates sooner have by far benefited the most.

In the UK, the Bank of England is set to raise rates in December 2021, one of the first major central banks to do so. Since then, it has raised its policy rate by 0.1 percent to 5 percent, with investors predicting a rise to 6.5 percent by next March, the highest level since 1998.

Meanwhile, Britain’s biggest banks have offered their customers 43 per cent returns on higher deposits.

“Not only is the UK seven months ahead of the eurozone in the cycle, but there is also a high degree of competition, especially with non-banks,” explained Nicholas Charney, an analyst at S&P Global Ratings, explaining why the UK’s deposit beta was the highest in Europe.

But as Britain grapples with rising inflation and rising mortgage rates, politicians, regulators and the Bank of England have called on banks to raise deposit rates for savers even higher.

The main problem in the UK is that fixed term mortgage rates are linked to swap rates, which have risen much faster than the BoE policy rate.

Citi analyst Andrew Combs said, “Politicians don’t want to see that mortgage rates are so high compared to savings rates.”

Meanwhile, as US banks expect the Fed to hike interest rates by 25 percent from March 2022 until April this year, deposit betas have “increased materially” since then, S&P analysts estimate.

Still, corporate and institutional customers have called on US lenders to raise their deposit rates further.

American lenders are under more pressure than European counterparts to pass on the benefit of rising rates to their customers because of competition within the market, not only among banks but also because of the different savings products offered.

According to Citi, unlike European banks, which have generally seen modest inflows into deposit accounts in the past year, US banks have faced 5 percent outflows over the same period.

“The biggest difference between European and American banks is the flight of money markets in the US, where it is much easier to move money from a bank account into a money market product or even buy Treasuries,” Combs said.

“The ease of movement is part of the dynamic that explains why American banks are willing to offer higher deposit rates.”

Across the eurozone, where the European Central Bank is set to raise rates in July 2022, banks have been slow to pass on benefits to their customers. The average deposit beta for large eurozone banks in the nine months to April this year was 18 per cent, compared with 36 per cent in the first nine months of the previous period of steadily rising rates in 2005-8.

Analysts said one of the main reasons for the delay is the pace with which policy rates have been raised this time as compared to 2005.

You are viewing a snapshot of an interactive graphic. This is probably due to being offline or JavaScript is disabled in your browser.

French lenders have been most willing to share the growth with customers. A major factor in this is the popularity of the livrette à, a 200-year-old savings account designed to help restore France’s public finances after Napoleon Bonaparte’s wars.

Leverate A deposit accounts are linked to inflation and set by the government. At 3 percent, rates on the account are at their highest in 14 years.

Luxembourg banks have the highest level of deposit beta across the eurozone at 36 percent, but a quarter of this is due to customers switching from current accounts to fixed-term accounts, which offer higher rates in return for locking up their money for a year or more.

Countries such as the UK, Spain, Italy and Ireland have very low rates of migration to high-earning accounts as savers prefer quick access to savings while facing rising costs.

Countries most affected by the eurozone crisis more than a decade ago – such as Ireland, Spain, Greece and Italy – where the region was forced to consolidate – have also proved much less willing to pass on policy rates to customers.

“If you have fewer banks in the system, they control the market and they can more effectively control how much is transferred to consumers.” S&P’s Charne said.

The pass-through rate of Spanish banks is one of the lowest in Europe, despite the socialist-led coalition government imposing a controversial windfall tax this year aimed at affecting banks that have benefited most from a rise in net interest income.

Charney said, “I’m not sure how effective the windfall tax was in motivating banks to raise deposit rates – it doesn’t address the main factor, which is the level of competition in the market.”

Citi estimates deposit beta across the eurozone will rise from an average of 25-30 percent this year to 30-40 percent next year, while US banks will rise to 45-55 percent by the end of this year.

“Ultimately it depends on how much political pressure banks are willing to bear compared to the profits they are making after years of low or negative rates,” said a European Bank official.