Between November 2021 and January 2023, Bank rate rose from 0.1% to 3.5%, subsequently increasing further, to 4%. Over that period, the average interest rate paid on individuals’ sight deposits rose from 0.09% to 0.89%, while the average rate on time deposits rose from 0.34% to 1.82%, according to Bank of England data.
What happened to lending rates over that period? For new secured loans to individuals, the average rate increased from 1.5% to 3.88%, while for other loans the average rate rose from 6.02% to 8.35%. There were similar changes when applied to deposits and loans to businesses.
What this has meant for the banks’ interest margins will be explored shortly, but there is an important caveat to be made before concluding that the banks have been fleecing customers under the cover of rising official interest rates. This is that the interest on the banks’ loan books changes only gradually, in contrast to new business.
So, for personal; customers, the average rate on outstanding secured loans has risen from 2.02% to 2.54%, while that on other loans has only gone up from 6.54% to 7.09%, both clearly much less than the rise in Bank Rate. For business customers, the average interest rate on outstanding loans has gone up from 2.7% to 5.3%.
It is an important caveat, and there is another one. The failure of Silicon Valley Bank (SVB) and the takeover of its UK subsidiary by HSBC was a demonstration that, when the wrong decisions are taken, banks can be caught on the wrong side of a change in the interest rate regime.
Fortunately most were not, and for the overwhelming majority of banks, interest margins have risen and they have been beneficiaries of the shift in official monetary policy. According to a recent analysis by Fitch Ratings: “Net interest income increased materially in 2022, driven by rising interest rates, supporting the strong profits reported by the UK’s largest banks in their recent results announcements.”
The effects can be seen across the UK banking sector. According to Fitch, the net interest margin at Lloyds Banking Group rose from 254 basis points in the 2021 tax year, to 322 points by the end of last year. For NatWest there was a rise from 230 to 320 basis points, for Barclays from 293 to 397 basis points and for HSBC from 120 to 174. Santander UK saw a smaller rise, from 192 to 212 basis points, while Standard Chartered record a rise from 121 to 158.
These developments are not confined to the UK. “European banks are on course for a surge in income from lending in 2023 as central bank interest rate rises feed through to their loan books, concluding more than a decade of squeezed margins,” said S & P Global Market Intelligence recently. “Analysts’ forecast aggregate net interest income — the difference between interest revenues and interest expenses — will grow more than 10% in 2023 at a selection of Europe's largest banks, S&P Global Market Intelligence data shows. Such an increase would give the banks more than €25 billion (£22 billion) in additional revenue from NII, which represents the majority of income for most lenders, the data shows.”
European banks have benefited from similar factors as those in the UK, with the European Central Bank raising rates several times. Net interest income for Europe’s largest banks rose by an average of 16.5% in their 2022 financial years, with a smaller but significant 11.6% rise on course for 2023.
It is a similar story in America, where net interest income has also soared in the wake of higher official interest rates from the Federal Reserve and increased margins. In the fourth quarter of 2022, net interest income at Citigroup showed a 22.7% rise on a year earlier, while J P Morgan Chase was up by 48.5%.
This is unlikely to continue. Analysts believe that the growth rate of net interest income for the banks is close to peaking or is already past its peak. There are at least two reasons for this. The first is that the circumstances of the past 12-15 months, when central banks have moved aggressively from near-zero official rates to levels not seen since before the global financial crisis, are unlikely to be repeated. This was a perfect situation for the banks. As it stands now, even if official interest rate peaks have not yet been reached, they are in sight.
The second factor is that banks have to respond to competitive pressures in the rates they offer depositors. Gone are the days when personal and business customer have to accept what they are offered, unaware of what is available elsewhere. The internet may not have created a perfect market, but it has certainly increased transparency.
You can see this process at work in the UK data. For new business, as opposed to outstanding business, the average interest rate on time deposits went up from 0.37% at the end of November 2021 to 3.51% in January this year, almost matching the rise in Bank Rate over the period. For new business time deposits, the increase was from 0.1% to 3.11%.
The banks have done well out of higher official interest rates and increased margins and should make the most of it. This is not an effect which will provide them with a permanent lift.