Entities make credit more expensive with ECB rate hike, but limit expected recovery of what they pay for deposits
The theory says that and so does the financial logic. The tightening of monetary policy by the European Central Bank (ECB), which led to the first rate hike in 11 years in July, is basically translating into more expensive loans and a more attractive return on savings.
The bank’s response was immediate to the first part of the equation. Since the beginning of the year, and with the rise in the Euribor as a backdrop, the weighted average rate for new home loans came in at 1.70%, compared to 1.38% at the end of last year. And a similar evolution presents consumer loans, which according to the Bank of Spain are already around an average interest rate of 6.59%.
However, a trend not seen so intensely in the reimbursement of deposits, the big savings option for families after the pandemic, which has just set a new maximum with EUR 994,982 million ‘saved’ at banks. It is true that some entities are already offering products with slightly more profitability. But the average interest rate at which sight deposits (current accounts) are reimbursed – where most savings are concentrated – remains unchanged at 0.015%.
The average of time deposits improved slightly to 0.067% from 0.064% at the end of last year. But this slight increase is more due to the supply of foreign entities or the so-called neo-banks (digital activity only) that aim to fill a gap that, at least for now, the large national entities are reluctant to fill.
They don’t need it. The Bank of Spain itself has acknowledged in a recent report that the pay for family savings would improve in the coming months. But he explained that the increase in money market rates will not yet be noticed “because of the lower need for funds by entities”.
That is, the banks have sufficient liquidity to meet credit demand and do not have to engage in an urgent liability war as in other periods when attracting new customers was a priority objective. And if it came at the cost of stealing from the neighbors, even better. For example, the average return on time deposits in 2008 was even above 5%.
This kind of move is no longer necessary, especially in a less competitive environment following the bank restructuring process in Spain. But just as credit is getting more expensive, consumer associations are calling on banks to reverse the zero return they are now offering on their deposits. A drought to which is added the ‘worm effect’ that inflation exerts on the money the Spaniards hoard in their bank.
All indications are that we will have to wait months, and further interest rate hikes by the ECB, to see something better in this market segment. Some managers of the sector have already manifested themselves in this sense. This is the case of Gonzalo Gortázar, CEO of CaixaBank, who made it clear in the last presentation of the accounts of the entity that “our strategy is not rewarding”. They don’t see the point in paying a little more in an inflationary environment like the current one. They prefer their clients to circumvent inflation through other types of products, such as mutual funds.
Another major entity consulted calculates that to achieve a return of 0.5% on deposits, the ECB’s interest rate would have to rise to at least 1.5%, from the current 0.5%. They indicate that the sector also needs to analyze the impact that the new tax announced by the government will have, as “what comes from one side cannot be assigned to another”.
In this scenario, the option seems to be to ban deposits from the catalog to bet on other types of products, such as interest-bearing accounts, where there is more room for maneuver. Especially in the online offer. In fact, movements in this direction have already been observed. Banco Sabadell has just launched an account that offers 2% in exchange for minimum terms, such as direct debit from payroll or household receipts. And bonuses in return for more “loyalty” from customers has long been the trend across the rest of the industry giants.
It has been one of the major anomalies caused by the ultra-expansive monetary policy of recent years. The decision of the European Central Bank (ECB) to place the interest rate of the so-called deposit facility negatively forced banks to pay for the liquidity they deposit into the monetary institution.
After years of negative interest rates and with almost no room for manoeuvre, many entities decided in early 2019 to charge the deposits of their major clients – institutional and corporate – to cover some of that burden. Despite this fine, which was mainly applied to companies with few links to the entity, the volume of deposits in this segment has not stopped growing.
At the end of 2019, this amounted to 258,267 million euros. A year later, in the midst of the corona crisis, the number grew to 296,277 million, only to rise further the following year to 305,969 million. According to the statistics of the Bank of Spain, it currently stands at 317,790 million, 23% more than in the year when the banks generalized the collection of large customers.
More than three years later, the entities return to reimburse those deposits. That is, companies have stopped paying to have their money in the bank.
In particular, the weighted average rate applied to the sector was positive at 0.328% in June, from -0.093% in the previous month. A move that shows that financial companies have started shifting interest rate hikes to this business segment. The most striking change is observed in deposits up to one year, for which the average return is 0.334%. It is the first positive record of the entire year and much higher than the -0.102% applied in May.
The trend is also visible within more than two years. Although the entities have not applied negative rates on this term, the June reward was 0.306%, the highest of this 2022.
Source: La Verdad
I’m Wayne Wickman, a professional journalist and author for Today Times Live. My specialty is covering global news and current events, offering readers a unique perspective on the world’s most pressing issues. I’m passionate about storytelling and helping people stay informed on the goings-on of our planet.
