“We are aware of the public discussions about savings interest rates,” Steven van Rijswijk, ING’s CEO, is quoted in the press release about the bank’s quarterly figures, which were presented on Thursday. Many consumers have been wondering for some time why their savings interest rates have not risen (much) faster, just like the interest rates of the European Central Bank, which have risen sharply, as well as mortgage interest rates. These questions also play a role in politics in The Hague.
Yet so far ING has not been guided too much by these “public discussions”, as became clear on Thursday. It was not the savings interest rate that increased, but the future remuneration of shareholders. The bank announced that it will buy back 2.5 billion euros worth of its own shares. Because this shrinks the total number of shares in the market, shareholders can count on higher prices and profits. In November last year, ING already bought back 1.5 billion euros worth of its own shares.
In the meantime, savings interest rates for customers of ING and other banks are lagging behind. Since mid-October, ING has paid 1.5 percent interest on the first 15,000 euros in savings accounts. This rate, comparable to that of other major banks, is better than the zero interest rate that was common for years. But the savings interest rate is low compared to the deposit interest rate that banks receive at the ECB on excess deposits, namely 4 percent. This ECB interest rate was negative until mid-2022 and has therefore risen much more sharply than the savings interest rate. In the wake of the ECB interest rate, mortgage interest rates, a traditional source of income for banks, also rose sharply (to around 4.5 percent for a ’10-year fixed’ mortgage with ING).
ING benefited significantly from the increased differences between interest income on the one hand and interest expenses on the other, as Thursday’s quarterly results show. The bank made almost 2 billion euros in profit in the third quarter, doubling compared to the same quarter a year earlier. This is mainly thanks to the ‘interest margin’. This is roughly the difference between the interest that banks pay on savings and the interest they receive on mortgages and other loans, such as loans to entrepreneurs.
High interest margins, high profits, higher remuneration for shareholders, low remuneration for savers – it has now become a pattern at banks, a pattern that does little for their social reputation. Political dissatisfaction with skewed growth has increased.
ACM research
This week, the ACM announced that it will examine the savings rates of the major banks in the Netherlands. The competition watchdog is conducting an investigation into a possible lack of competition in the savings market, at the request of outgoing Minister of Finance Sigrid Kaag (D66). “There are indications that Dutch consumers benefit only to a limited extent from the increased interest rates on the European market,” the regulator writes. Kaag had previously said that she thinks it is desirable “from a social perspective” that “there comes a time when the interest rate increase is sufficiently implemented for savers.”
At the same time, the purchase of own shares is in the sights of politicians. At the proposal of GroenLinks-PvdA, D66 and the Christian Union, the House of Representatives last week adopted an amendment to the law to tax this means of appeasing investors. Not only at banks, but at all listed companies. Until now, the purchase was exempt from dividend tax under certain conditions. The tax on share buybacks should come into effect in 2025. ING avoids the measure: the purchasing round announced on Thursday must be completed in April 2024.
Why is this political pressure necessary and why doesn’t a bank like ING choose to reward shareholders a little less and savers a little more? Van Rijswijk was asked that question in an interview with RTL Z on Thursday morning. His message was, in so many words: society as a whole also benefits from ING’s good stock market performance. Investors want “a good return,” he said. “This also includes pension funds. And behind that are people with a pension, for whom a good return is also important.”
In addition, Van Rijswijk said, it is not good for a bank to hold too much capital. This is also why the number of shares (a form of capital) in the market is reduced. ING’s core capital ratio (‘CET1’), an important buffer indicator, is currently over 15 percent, while regulators require a minimum ratio of just under 11 percent. ING wants to reduce its own buffer to 12.5 percent. Because the higher the excess capital, the greater the “pressure on business operations,” said Van Rijswijk. With a lot of excess capital, there is also pressure to make extra profit, because the bank’s shareholders demand a return (usually around 10 percent). To prevent too much pressure on the organization, “we return capital to the shareholder.”
And those savers? “I understand that people want higher interest rates, but we have to keep the bank safe in the long term,” Van Rijswijk told RTL Z. “The profitability of banks has been very low for three years. A strong bank is in the interests of all stakeholders, including savers.”
ING’s choices touch on a broader debate about the role of companies in society. Is the shareholder’s profit central? Or should social objectives prevail, or at least play a role? It is not always a simple debate, because, for example, as Van Rijswijk says, investors also support ordinary citizens with pensions.
Shell also buys shares
There were also quarterly figures on Thursday from another company that is under fire because of its social role: Shell. The British oil and gas giant, listed on the Amsterdam stock exchange, announced in its quarterly report that it will buy back $3.5 billion of its own shares. The total share repurchases in the second half of the year amount to 6.5 billion dollars. That number is “much higher” than the $5 billion that Shell had promised in June. An extra gift for the investor.
The oil sector has in common with the banking sector that it has been making good profits recently, and in the case of the oil sector even very good profits. Shell made a profit of $6.2 billion in the third quarter. Great for the shareholders, but they also look at Shell’s competition in the United States: there, by the oil majors Exxon and Chevron, made even more money. Their stock prices have also risen relatively more.
Shell could use its profits to invest in renewable energy, but pressure from investors is increasing to do just the opposite: focus more heavily on fossil energy, and therefore go against the socially widely supported goal of reducing CO2emissions.
That is what Exxon and Chevron also do. They recently made major acquisitions to expand fossil activities. Exxon paid $60 billion for Pioneer, a producer of shale oil and gas. Chevron acquired oil company Hess for 53 billion, in order to gain access to an important oil field off the coast of Guyana. As a result of the acquisition, “higher distributions to shareholders” are in the offing, Chevron said.
The American economist Milton Friedman wrote the much-cited piece in 1970 The Social Responsibility of Business is to Increase its Profits: the social responsibility of companies is to increase profits.
This focus on profit maximization for shareholders has never been uncontroversial, not in the US, but certainly not in Europe. A counterpart to Anglo-Saxon shareholder capitalism is the Rhineland model, in which companies are assigned a greater social role.
In any case, the buyback programs of ING and Shell show that European boardrooms are paying particular attention to shareholders. Social wishes about the reward of savers, or about the climate, are less important.