Another interest rate hike to boost banks’ profits, but how long will the windfall last?
Bank shares prices were mixed after the Bank of England raised interest rates by 50 basis points earlier today, as the pressure on banks to pass on higher interest rates to savers grew.
The more domestically focused Lloyds and Natwest were trading 1.0 per cent and 0.6 per cent higher respectively. Barclays was up 0.8 per cent. HSBC and Standard Chartered, both with large international footprints, were down 1.8 per cent and 2.9 per cent respectively. .
While higher interest rates have boosted profit over the past year, pressure is growing on the UK’s leading lenders to offer higher interest rates on savings accounts.
“A higher pass-through of rate hikes to depositors is becoming increasingly necessary, and being pushed by regulators”, Phillip Richards, Senior Analyst at Bloomberg Intelligence, commented
This will drive “a rise in retail-funding costs which will squeeze banks’ overall margin,” he continued.
Hargreaves Lansdown’s Helen Morrissey cautioned that even if some decide to pass on today’s rate hike “it may be several weeks before savers see the benefit.”
Indeed, Morrissey suggested that banks are unlikely to increase savings’ rates if they think customers are unlikely to search for a better deal. She noted “better rates are available across the market among smaller, online players so there are better deals to be had.”
Investec’s Ian Gordon was less convinced that savings rates will increase. “The simple fact remains that UK banks are awash with excess liquidity, so they have no commercial imperative to bid up rates.”
“The further rise in base rate will merely cement existing market expectations for higher net interest income among the UK domestic banks,” he continued.
However, Gordon still felt that “relative to the muted pass-through on ‘relationship’ savings thus far, I would expect a higher proportion of today’s rise to feed through to customers.”
Banks will be under the spotlight next week when heads of the leading UK lenders – with the exception of Natwest’s Alison Rose, who is “too busy” – will be hauled in front of the Treasury Committee.
They will be scrutinised about why higher savings rates have not already been passed on even though customers are paying more for their mortgages.
Higher interest rates have proved very lucrative for UK banks over the past year or so.
AJ Bell’s Russ Mould said “the five banks’ average net interest margin has increased by 40 basis points from the lows to 2.18 per cent.”
“Four-tenths of one per-cent might not sound a lot, but on an aggregate loan book of £2.4trn between them, each basis point (0.01 per cent) is the equivalent of an extra £240m in pre-tax profit,” he said.