£1.3BILLION: the cost of a rate cut to UK’s big banks
Fears that lower interest rates will NOT be passed on to borrowers
BRITAIN’S big banks are facing a £1.3billion hit to their profits if, as expected, the Bank of England cuts interest rates on Thursday.
There are fears that the banks could attempt to contain the damage by not passing on the benefit of lower rates to borrowers – risking fury from customers and regulators.
Very low interest rates squeeze bank profit margins, so there will be further losses if the 0.25 percentage point cut is passed on to customers.
Many current account holders and depositors are earning zero interest so banks will not be able to reduce the rates they pay to those customers, but at the same time they must cut rates on loans linked to the bank rate and this will slash their profits.
Analysts at investment bank Goldman Sachs have calculated that a quarter-point fall would result in RBS facing a £415million hit, Lloyds £409million, Barclays £226million and HSBC £343million.
The banks themselves claim the hit would be smaller. Lloyds said last week that the cut would cost it just £100million, while RBS said earlier this year that a quarter-point cut would cost it £96million. Barclays has put the hit at £191million.
Ian Gordon, an analyst at broker Investec, said: ‘There is an expectation that a rate cut will not be fully passed on to most borrowers.’ He said any sign that the banks are dragging their feet is likely to provoke anger.
Savings rates could be slashed more than many expect because banks are attracting huge amounts of cash from corporate customers, he added.
Economists believe the Bank of England will cut rates and restart its quantitative easing programme this week amid signs that the economy has cooled rapidly following the vote to leave the European Union.
The Bank is also likely to slash its economic growth expectations in its first official forecast since the Brexit vote. It is expected to cut its forecast for 2017 growth from 2 per cent to
zero. Meanwhile, Barclays and RBS, which reports results next week, performed poorly in stress tests on more than 50 European banks released by European regulators late last week.
The test is designed to show how well leading banks’ capital buffers – measured as a percentage of their total lending – would bear up under a new financial crisis.
Low level of capital in banks in the past contributed to the crisis of 2008, as reserves proved too little to cope with the banks’ losses on bad loans.
RBS showed one of the sharpest falls under last week’s tests. Its capital dropped by 7.5 percentage points to just over 8 per cent.
Barclays also emerged poorly. Although its capital buffers fell less sharply in the hypothetical financial crisis, just 4 percentage points, it fell to a lower level of 7.3 per cent.
None of Britain’s banks fell below the 4.5 per cent legal minimum.
Data from research group IHS Markit earlier this month suggested that the economy is on course for a 0.4 per cent decline for the third quarter of the year. IHS Markit will update its figures this week.
THE first half of this year was a ‘total wipe-out’ for savers, with rates falling and dismal new deals. But experts say the outlook is even more chilling. Here, The Mail on Sunday analyses the state of the savings market, what to prepare for next – and how to get a better deal.
SAVINGS rates are locked in a death spiral – with the relentless trimming of accounts that people rely on to help fund their retirement or build a nest egg for the future.
There is little hope of this problem abating, as the Bank of England is widely expected to chop the base rate further – from its current low of 0.5 per cent where it has remained since March 2009. The Bank’s Monetary Policy Committee could act as early as this Thursday.
A more extreme threat of negative interest rates cannot be ruled out following a warning to 1.3million business customers from Royal Bank of Scotland, which also owns NatWest, about the possibility of having to charge for holding their cash deposits.
HSBC has indicated it could do the same, but it would only affect business customers who hold deposits in a foreign currency.
Santander, Lloyds and Barclays all say they have no plans to charge customers for cash deposits. The former two point out they constantly review rates, while Barclays says it plans ‘for every type of scenario’ and until something changes there is no point ‘fuelling confusion’.
A move to negative interest rates is seen as highly unlikely, despite the tactic having been used elsewhere in the world.
But any cut in base rate by the Bank of England will mean poorer deals for those with money to squirrel away.
Many savings accounts already offer rates well below 0.5 per cent.
Charlotte Nelson, of financial research company Moneyfacts, says: ‘Savers have been caught in an endless spiral of misery, with rates cut dramatically and falling to the lowest level on record.
‘A base rate cut to 0.25 per cent will only further savers’ pain.’
THE SCALE OF THE PROBLEM
CHEAP funding for high street lenders was delivered by the Bank of England in the summer of 2012. This meant banks and building societies no longer needed to rely on customers’ deposits to fund home loans. It had a devastating impact on savings accounts.
According to rate-watcher SavingsChampion, there have been 4,904 cuts to existing savings rates in the past four years.
In the seven months before funding for lending there were 22 cuts to existing account rates.
In the seven months that followed there were more than 459. Moneyfacts research shows the average Isa rate has fallen from 2.57 per cent five years ago to 1.14 per cent today. Anna Bowes, of SavingsChampion, says: ‘Banks and building societies don’t need an excuse to cut rates. ‘A third of easy access accounts pay 0.25 per cent or less – but your money does not need to sit in one of them. You can do better.’ Someone with £50,000 in an account paying a derisory 0.25 per cent can earn an extra £500 interest a year by moving to a 1.25 per cent easy access deal.
A MARKET UNDER SCRUTINY
THE City regulator, which has been investigating the savings market, recently produced a long list of easy-access savings accounts that pay the lowest rates – from nothing to 1.5 per cent.
The Financial Conduct Authority’s study also revealed accounts opened a long time ago pay lower rates than those set up more recently – yet many savers do not switch to a better offer, even with the same provider.
Half of providers on the regulator’s list pay 0.1 per cent or less on accounts that are managed inbranch and no longer available.
From December this year provid-