Lloyds used record low rates to bump up profit margins

BRITAIN’S biggest bank hiked its profit margins by fiddling with borrowing and savings deals while interest rates languished at record lows.

A Mail investigation has discovered how Lloyds Banking Group has managed to push up its profit margins on loans and deposits to the same level as before the financial crisis.

This is despite big finance houses complaining that the record low Bank of England base rate of 0.25pc set in August last year after the Brexit vote had squeezed their returns.

After rates were increased on Thursday, none of the big banks has promised to increase savings rates, while many have pledged to raise the cost of mortgage deals.

Lloyds’ net interest margin, which essentially measures the difference between what they make from borrowers and what they pay savers, has climbed to 2.9pc. This is an increase from the 2.74pc it made when rates were last 0.5pc, and the 2.69pc it made just after the cut.

Santander has also managed to tweak its interest rates so they are also making more cash from savers and borrowers.

Its net interest margin is 1.91pc, compared with 1.55pc before the last rate cut.

Critics blasted the lenders for lining their own pockets at the expense of hard-pressed families.

Justin Modray of consumer group Fairer Finance said: ‘It’s extraordinary that margins have gone up and suggests the public is being treated as a cash cow.’

When the Bank of England cut interest rates to 0.25pc it was widely predicted to damage High Street lenders’ earnings by making it more difficult for them to rake in fees from borrowers. Banks make their profits by collecting deposits from savers and lending them out to borrowers.

In most cases, the margin for lenders fell after the Bank rate was cut – at Barclays’ UK business, for instance, it dropped from 3.59pc before the reduction in June 2016 to 3.28pc a year later.

But Lloyds and Santander made cunning tweaks to their products to bump up their bottom line.

Lloyds’ net interest margin is at the highest level in more than a decade, before the financial crisis decimated banking. But at the end of 2006 – when the margin was last higher – the Bank rate stood at 5pc. Meanwhile, customers with Lloyds’ Easy Saver account earn a measly 0.05pc a year in interest – or just £5 for every £1,000 they have saved.

The bank is thought to have £90bn of mortgages which track the Bank rate and will therefore automatically increase in price, adding £1bn to the coffers of the lender. It means profits will see an instant uptick thanks to the rate hike.

Santander’s profits climbed 1pc to £1.6bn in the first nine months of the year. The bank faced a fierce backlash after the cut for hacking the interest on its popular 123 current account from 3pc to 1.5pc. Lloyds and Santander both said the rate cut was passed on in full to mortgage customers.

A Lloyds spokesman said the bank’s £ 1.9bn acquisition of credit card firm MBNA earlier this year had boosted margins.

A Santander spokesman said it cut mortgages more aggressively than savings when the bank rate went down, meaning its margin was initially squeezed.

He said: ‘Our improvements to banking net interest margin have occurred primarily as we made changes to the Santander 123 account in light of falling savings rates across the industry over the past few years.’