Member Article

Banks, savers & businesses with deposits the big losers if Bank cuts rates this week

New research from pricing strategy specialists Simon-Kucher shows that if the Bank of England decides to cut base rates this week, the big losers will be savers and businesses with surplus liquidity in the form of bank deposits, and the banks themselves, which stand to lose £1.2bn in annual profits.

Hrishi Rajadhyaksha, a director with the Financial Services practice at Simon-Kucher, notes: “A rate cut of 0.25% would see the top ten UK lenders losing £1.2bn in annual pre-tax profits from lower net interest income, as well as being bad news for savers and businesses with funds on deposit. Of course, bad news for the banks’ profits is bad news for the millions of people who own them, whether directly through shares or indirectly through their pension funds. By contrast people with large variable mortgages will be the winners.

“If the base rate is cut, we expect to see banks pass it on right away wherever possible. Savers with instant access deposits and corporates will feel the reduction immediately, although for many interest rates are so low they may barely notice: currently someone with £20,000 of savings will lose just £20 a year from the change because they are currently earning the somewhat measly sum of £100 per year interest on it.”

Key findings from Simon-Kucher’s analysis includes:

A rate cut of 0.25% would cause the top ten UK lenders to lose £1.2bn in annual pre-tax profits, an impact of about 7% compared with 2019 estimates. This is driven by a £3.7bn loss in interest income, partly offset by a £2.5bn reduction in funding costs, as a result of the rate cut. For context, their total half year pre-tax profits in the first half of 2019 were £8.1bn, translating to a rough expectation of £16.2bn annually. This is represented by an expected drop in average NIM weighted by total assets of approx. 7bps. {Net interest margin (NIM) is a key measure for banks of the difference between the interest income generated through interest and the amount of interest paid out (for example, deposits), relative to the amount of their (interest-earning) assets} Banks with a larger share of instant access personal deposits and corporate deposits, such as, will fare better than others. This is because these banks will be more able to pass on the rate cut to these accounts. By contrast, fixed term personal savings accounts will only face lower average rates only in the longer run as customers roll off their current rate, or new customers join. Banks like RBS and Barclays that are weighted towards more non-interest bearing deposits, will find it harder to pass on any impact of a rate cut.

Businesses with money on deposit will be losers, particularly as there is often a greater willingness to pass on lower interest rates through to corporate deposits than on personal deposits. Banks with a higher proportion of corporate deposits include Barclays and HSBC.

Simon-Kucher expects such a cut would cause personal instant access savings accounts to offer rates on average 0.1% less than current levels. A person with £20,000 of savings will currently earn only £100 (based on a typical instant access deposit account). If the rate goes down Simon-Kucher expects they will earn just £80 a year.

Simon-Kucher expects such a cut to also cause residential mortgage rates to decrease on average by 0.19% less than current levels. A first-time buyer borrowing £150,000 with a £50,000 deposit (and a 75% loan to value) can expect their monthly payments to go down by roughly £14 (£168 annually).

Our research in countries with an even lower interest rate environment (including those with negative rates, such as Germany and Switzerland) suggests an increased appetite for moving bank deposits to investments when rates stay low for extended periods. There is an opportunity for banks with strong investment offerings to channel customers towards their investment arms. Halifax (a subsidiary of Lloyds), Barclays, and Santander have notably strong investment propositions.

This was posted in Bdaily's Members' News section by Kewalin .