Low interest rates ‘a challenge’ as banks rethink strategy

O n e o f t h e wo r l d ' s b i g g e s t l e n d e r s h a s w a r n e d t h a t r e c o r d - l o w i n t e r e s t r a t e s around the world could challenge the banking sector long term, as it set out to re-think its strategy.

HSB C said its revenue had dropped by 11% to 11.9 billion US dollars (£9.2 billion) in the third quarter of the year, compared with the same period in 2019.

The reduction came largely as a result of lower net interest income, as interest rates were slashed by central banks around the world.

Even before the Covid-19 crisis, the interest rates set by central banks had not recove r e d f r o m t h e s h o c k o f t h e financial crisis more than a decade ago.

B e f o r e t h e c r a s h , i n J u l y 2007, the Bank of England's base rate was 5.75%. Less than t wo years later, after several cuts, the rate was set at 0.5%, where it stayed until 2016.

It meant that, when Covid-19 hit, rates could not drop much lower.

In March, the Bank reduced its base rate to 0.1%, and has n o t r u l e d o u t r a te s t u r n i n g negative, as they have else - where in the world.

"T h i s r a i s e s a n u m b e r o f risks and concerns, such as the readiness of our systems and processes to accommo - date zero or negative rates, the resulting impacts on custome r s , r e g u l a t o r y c o n s t r a i n t s and the financial implications given the significant impact that prolonged low interest rates are likely to have on our net interest income," HSB C said yesterday.

It added that these, and other factors "may challenge the long-term profitability of the b a n k i n g s e c t o r, i n c l u d i n g

HSBC, and will be considered as part of the group's transformation programme."

That programme includes steering away from net interest income as its main source of income, and focusing more on making money through fees, said Fiona Cincotta, an analyst at City Index.

"This marks a huge shift in strateg y but one that make absolute sense given the rockb o t t o m i n t e r e s t r a t e s t h a t have dominated the banking scene for years and are look set to stay for the foreseeable future," she said.

H o w e v e r, H S B C ' s t h i r d - quar ter results were not all doom and gloom for investors.

The bank now expects that its losses will be at the lower end of the 8 billion to 13 billion US dollars (£6 billion to £10 billion) that it had previously expected.