Prominent in the manual handed out to new UK chief executives is one line, underscored in bold: Avoid a select committee hearing.
Not really. But it should be. It is rare that anyone emerges from such an event with their reputation meaningfully enhanced.
After an attempt by NatWest boss Alison Rose to swerve an appearance in front of the Treasury select committee this week, she lined up with her equivalent from Lloyds and the UK chiefs of HSBC and Barclays.
As it turns out, this was the careful searing variety of a parliamentary grilling, rather than a full incineration. The main bone of contention was savings rates, where banks have been slow to share the benefits of rises in the Bank of England base rate with their customers. As of December, banks had passed on about a quarter of UK rate hikes cumulatively, according to Credit Suisse, with savers seeing nothing of the first increases before the situation improved towards the end of last year.
Of course, banks were much quicker to put up lending rates. So net interest margins are expected to have recovered nicely in this month’s full-year results. Lloyds boss Charlie Nunn was keen to point out that its interest margin is only getting back to 2018 levels. But that doesn’t tell the whole story: in that time, customers have shifted out of pricey standard variable-rate mortgages and paid off credit card debt, both higher margin businesses. Since the financial crisis in fact, banks have become less risky, less profitable institutions as far as business mix is concerned.
In terms of return on tangible equity, notes Shore Capital’s Gary Greenwood, the domestic UK banks look set to get back to a level in the mid-teens this year, comfortably exceeding their cost of equity. In fairness, this is finally a return to something approaching economic normality after the post-crisis years, where banks couldn’t make their usual margin on deposits because interest rates were so close to zero.
But banks seem to have found their new normal faster than their customers. The speed of rate rises, the backdrop of the cost of living crisis and the self-inflicted carnage of Liz Truss’s “mini”-Budget haven’t helped. While the bank bosses on Tuesday played up a competitive market and the range of products on offer — many with higher than the offending sub-1 per cent rate on offer for instant access accounts — customers aren’t yet taking full advantage.
Only 28 per cent of household deposits are in higher rate “time deposit” accounts, where money is tied up for a set period. That is up slightly on the low point last year, but compares to 40 per cent back in 2014, according to Credit Suisse. As consumer behaviour changes so will bank pricing: it’s notable that HSBC’s Ian Stuart reported a pick-up in customers shopping around for higher rates from last August, which (coincidentally) is when banks passing on of rate rises to their customers noticeably started to improve.
In the US, helped by quantitative tightening by the central bank, deposit balances are falling across the banking system, in part as customers look elsewhere for higher rates such as money market funds. JPMorgan Chase in January managed down expectations for net interest income as it needs to pay higher interest rates to attract deposits. In the UK, deposit growth has slowed markedly, and corporate deposits — which are less sticky and prone to move in bigger chunks — started to fall towards the end of last year, suggesting banks will have to compete harder.
The regulatory environment is also getting tougher. Financial Conduct Authority CEO Nikhil Rathi last year told the same committee he was keeping a “beady eye” on banks. On Tuesday, the parliamentarians were clearly itching for tougher action from the FCA, with a new consumer duty and a focus on good customer outcomes coming into force in July. That will heighten scrutiny on how actively banks shepherd customers into products offering better rates. Consumer inertia (or lack of confidence in making financial decisions, as the banks prefer) becomes more squarely their problem.
The market, however, is already showing signs of a shift. Just in time, no doubt, for the politicians to claim credit for it.
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