Dutch banks made the news twice this week with initially positive announcements. Savers get more interest, banks make more profit. But, as is often the case when it comes to banks, those messages were not received positively by everyone.
At the beginning of the week it was announced that de Volksbank (mother of ASN and SNS) was the last of the larger banks to set the interest rate on the savings account at 0.75 percent. This is an improvement compared to previous years, when savers received nothing from the bank. But the interest is nothing compared to inflation (more than 5 percent) and the interest charged by the European Central Bank (3.25 percent).
In the second half of the week, the more than good quarterly figures from ING and ABN Amro followed. Both listed banks managed to make considerably more profit. ABN Amro posted 48 percent more net profit, ING 46 percent. Rode? Especially the ‘interest margin’ of banks, traditionally the most important source of income for banks.
Roughly speaking, this margin is the difference between the interest that banks pay on savings and the interest they receive on business loans, consumer credit and, for Dutch banks, mortgage loans in particular – minus the costs a bank incurs to hedge interest rate risks.
The lagging interest rates on savings and rising interest margins provoked anger in politicians. Minister Sigrid Kaag (Finance, D66) said on Thursday after the publication of the ING figures that she wants to talk to the banks in the short term to address them “from a social perspective”. “I think it is important that there comes a time when the interest rate rise is sufficiently passed on to savers,” said Kaag according to the Financieele Dagblad.
Is that annoyance justified? Do banks insufficiently pass on the higher interest rates they charge on new loans to their savings customers, as Kaag suggests? And do banks make too much profit for that?
End of negative interest
Back in time. The past few years have been dominated by ultra-low and even negative interest rates. The European Central Bank, which has a stable inflation of around 2 percent as its main goal, ‘punished’ banks for years if they deposited their surplus money at the central bank. Instead of receiving interest, banks had to pay extra.
Partly due to social pressure, this negative interest rate was not fully passed on to savings customers. The banks charged an interest of 0 percent on most savings. Depositors with larger amounts were charged negative interest, but that concerned less than 5 percent of all savers.
At the same time, the other customers, those who took out a loan from a bank, benefited considerably from the low interest rates. For Dutch banks, this mainly concerns mortgage customers – more than half of the loans from the banks concern a loan with a house as collateral. Partly due to increased competition from insurers and other investors in this market, mortgage interest rates have been historically very low in recent years and customers have been able to fix that interest rate for longer periods – including at banks. At the beginning of 2022, mortgages could be taken out with a term of 10 years with an interest rate of just under 1 percent.
The interest margins of banks have therefore been under pressure in recent years. While that interest margin is the main source of income. The pressure on earning capacity was reflected in the stock markets: banks underperformed the average listed company for years. Financing other than savings was therefore relatively expensive for banks for a long time.
In 2023 there will no longer be negative interest rates. If banks put their money at the ECB, they will be paid 3.25 percent after the lowest increase last week. When banks lend their money, they get even more for it. ING and ABN Amro now charge approximately 4.5 percent interest on a ten-year mortgage.
Higher profit margins
The higher interest rates are visible in banks’ interest margins – and therefore in their profits. Why not higher interest rates? Savers now receive ‘only’ 0.75 percent interest on their deposits at the major banks, while if they want to take out a new loan or mortgage, they have to pay much more interest.
The difference may now mainly be a delay. DNB economists concluded in a study earlier this week that increases in ECB interest rates are more likely to affect mortgage interest rates than savings interest rates. This is not only the case now, but was also the case in 2005-2007, when the ECB also raised interest rates. “This is because banks only receive higher interest rates on new or variable loans,” the DNB economists write. “Existing loans with a fixed interest rate remain unchanged. An interest rate rise therefore only partially affects the [totale] loan portfolio and therefore on the interest income of banks.”
Banks offer a variable interest rate on many savings accounts. “A higher savings interest rate therefore has a direct influence on (almost) all savings and thus on the financing costs of banks.”
In other words: where a higher mortgage interest only yields a higher profit margin on the new loans, an increase in the savings interest yields more for all savers – and therefore also costs the banks more directly. “In order to maintain the interest margin of banks on all loans and savings balances, the interest on new loans must rise faster than the interest on (almost all) savings balances,” said DNB.
At the same time, there are banks on the market that already offer higher interest rates on savings. In the Netherlands, tech bank Bunq offers 2.01 percent interest, and insurer Centraal Beheer 1.05 percent. Even higher interest rates can be found across the border in Europe. The French Renault Bank offers 2.15 percent, in Sweden 2.14 percent is available from Nordax.
These differences with the major banks in the Netherlands – in addition to ING, ABN Amro and Volksbank and also Rabobank – can possibly be explained by the behavior of their savers. In recent corona years, consumers have saved a lot – and the bulk of that is with the major banks. “There is a surplus,” explains a spokesman for the Dutch Banking Association. “Banks will not get rid of that savings immediately, given the lower demand for loans from home buyers and SMEs.” According to him, Kaag is “very welcome” to have this explained.
Robert Swaak, the chairman of the board of ABN Amro, said earlier this year that there is therefore no one-to-one relationship between the savings interest rate and the ECB interest rate. “We also let that depend on consumer behavior – the Dutch already have a lot in their savings accounts – and also on our financing needs: do we need extra savings?”
If consumers now opt en masse to open a new savings account elsewhere and place all or part of their savings here – which is easier than opening a current account – it could therefore be that the major banks, in order to retain their savings, will increase their savings interest more. .
More for shareholders
The lagging of the savings interest rates of the major banks was not the only news fact that elicited a reaction from Minister Kaag. Part of the annoyance arose from ING’s announcement that the bank is using the higher profit to allocate one and a half billion euros for a share buyback program. The idea behind such a program is that by taking stocks off the market, earnings per share increase. That is good for investors with ING shares.
In addition, another EUR 829 million was set aside by ING as an additional dividend payment. After the annual figures – which were also good due to higher interest margins – ABN Amro already launched a share buyback program of 500 million euros. Kaag said about this on Thursday that “it is difficult to explain to the average saver, if he reads in the newspaper that there is a decision to buy back own shares”.
The buyback programs of ING and ABN Amro earlier this year were logically received positively by the shareholders – including the government itself. The increased share price of ABN Amro after the annual figures prompted Kaag in February to see whether the state’s interest in the bank could be reduced to below 50 percent.
According to the NVB spokesperson, it is necessary for Dutch banks to offer investors a good return on their – risky – investment. According to the spokesman, there is now not so much excess profit, but a return to a “healthy” level. “That is necessary to be attractive on the financial markets, to be able to collect money there other than savings as a bank.” This is a requirement to comply with the requirements of regulators.
According to professor of financial economics Arnoud Boot (University of Amsterdam), Kaag’s reaction was one for the stage. “Politicians and policymakers are supposed to say something like this when it comes to high bank profits and low interest rates on savings. You also see this when it comes to bonuses. And then they move on to the order of the day.”
According to Boot, there should be a much more fundamental discussion about how banks make their money now. “Why do we allow banks to earn dormant money in principle by accepting savings and depositing them without risk at a much higher interest rate at the ECB?”
In their article this week, the DNB economists also write that the low savings interest rate is partly the result of the ECB’s ample funding in recent years. “Partly because of this, banks currently have a relatively large amount of liquidity. […] This gives Dutch banks room to slowly adjust the interest on savings.”