UK banks’ net revenues from households have been unusually low in recent years but are now recovering as interest margins widen and payment protection insurance (PPI) compensation payouts slow.
The first chart shows average interest rates on deposits from and lending to households, derived by weighting together Bank of England rate and volume data for different forms of business. Lax monetary policy and inadequate regulation contributed to the lending / deposit rate spread narrowing from 4.0 percentage points (pp) in 1999 to 2.5 pp in late 2007, when the credit bubble burst.
Contrary to popular mythology, banks have not rebuilt their finances by widening their margin on household business. The spread, indeed, fell to a new low of 2.3 pp at the start of 2013. Easier funding conditions, however, have allowed banks to cut deposit rates by more than lending rates in recent months, resulting in the spread returning to 2.6 pp at end-2013.
Further widening is likely as maturing deposits are refinanced more cheaply. The average interest rate on the outstanding stock of time deposits, for example, is significantly higher than the rate banks are paying for new business – 2.3% versus 1.6%. The difference between existing and new lending rates is smaller: banks are earning an average 3.1% on new secured loans versus 3.3% on the outstanding stock.
The lending / rate deposit spread could return to 3.0 pp by end-2014. Assuming deposits of £1,150 billion, this would imply revenues* from intermediating household business of £34.5 billion in 2015, up from £25 billion in 2012**.
PPI payouts, meanwhile, totalled £6.3 billion in 2012 and are on course to reach £5.2 billion in 2013. They may subside to £3 billion or less next year – second chart.
Combining the spread and PPI assumptions, therefore, banks’ net revenues may rise from £19 billion in 2012 to £32 billion in 2015, implying a small drag on household cash flow and spending – a £13 billion increase is equivalent to 1.2% of 2013 disposable income.
*Revenues not earnings.
**Deposits from and lending to households were £1,118 billion and £1,190 billion respectively at end-2013.
