RE: Lloyds 2 year ISA 5%27 Jun 2023 20:01
LONDON, June 27 (Reuters Breakingviews) - Banks are
getting dragged back into the political spotlight. UK finance
minister Jeremy Hunt on Monday joined the ranks of those
claiming domestic lenders like Lloyds Banking Group LLOY.L ,
NatWest NWG.L and Barclays BARC.L aren’t doing enough to
soften the blow of skyrocketing consumer borrowing costs by
hiking savings rates. Lenders shouldn’t be surprised at the
renewed heat.
The bedrock of bank profitability is the net interest margin
(NIM) – what banks pay out to depositors relative to what they
charge mortgage-holders and other borrowers, divided by
interest-bearing assets. Last year this was 2.9% on average for
Lloyds, NatWest and Barclays. This year, buoyed by spiralling
rates, JPMorgan estimates it will be 3.2% for Lloyds and 3.3%
for Barclays and NatWest – the highest average level for over a
decade, per Refinitiv data. NatWest is expected to make a return
on equity in its retail division exceeding 30% this year,
according to analyst estimates compiled by Visible Alpha.
Confusingly, investors aren’t pricing lenders’ shares like
they’re the beneficiaries of a huge windfall. All three big
banks trade at around 5 times 2023 earnings, below their 10-year
averages. That’s partly because over 80% of the sector’s 1.7
trillion pounds in mortgage loans are fixed-rate products that
don’t immediately throw off more cash when rates go up. But it’s
also because analysts have for months flagged the risk of
“deposit migration”, where smaller bank competitors hike rates
on deposits and tempt savers to jump ship. JPMorgan said on
Monday it reckoned base rates would jump to 5.75%, but banks
would have to pass on 100% of recent rises to depositors
prepared to lock their money up for a set period.
Given all that, it’s tempting to think the market
competition will lead to more normal bank NIMs. If so, Hunt
wouldn’t need to act on the warnings of the UK Parliament’s
Treasury Select Committee, the Bank of England, and the
opposition Labour Party, all of whom already flagged how
unusually slow British banks have been to pass on rising rates
to customers. But there are grounds to be more proactive.
Lenders with a big share of the market have an incentive to drag
their feet on hiking savings rates: 60% of their deposits are in
the form of interest-paying instant access current accounts,
where customers may be more worried about the disruption of
changing provider than hunting for the best rate.
Hunt may be able to get banks to hike their savings rates
merely by veiled threats. If that doesn’t work, he could always
encourage National Savings and Investments, a government-backed
savings provider, to drag them to do so by upping its rates, or
he could use the UK’s 39% stake in NatWest to oblige it to pay
more. After all, the government would only be getting banks to
do what they should be doing anyway.
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