A leading analyst has warned that negative interest rates could cost Britain’s ‘big five’ banks £1 billion a year in lost profits.
A cut in interest rates to -0.15% would knock up to 11% off the leading banks annual profits, even if they implement offsetting measures like those used within a eurozone. The warning comes from Raul Sinha, bank analyst at JP Morgan Cazenove.
The hardest hit would likely be NatWest Group, 62% of which is owned by the taxpayer, followed by Virgin Money and Lloyds Banking Group. According to Mr Sinha, HSBC UK and Barclays would be the least affected of the five leading UK banks.
The Bank of England is set to publish their findings of a review into whether or not high street lenders are operationally ready for negative interest rates on February 4th 2021. They launched a review last year and the published results are expected to include a cost-benefit analysis and an updated economic forecast.
It’s thought the bank is not looking to lower interest rates deep into negative territory but could instead look to mimic action taken in the eurozone such as Sweden or Denmark, and cut rates to around -0.5%. The current UK rate is 0.1%.
Negative rates can be catastrophic for banks as they hammer profits by imposing a charge on deposits held at the central bank that they are unable to pass on to household savers and often struggle to pass to business customers.
The European Central Bank introduced a tiering system which could offset some of those profit pressures within the eurozone however Mr Sinha claimed that the deposit amounts of UK banks are so large that a -0.15% rate would be incredibly costly, even with a eurozone style tiering system.
Banks are already alarmed at the prospect of negative rates with Head of UK Commercial Banking at HSBC Amanda Murphy last month telling MPs that the rates would impose a “considerable” cost.
“We may see some very peculiar behaviours such as people hoarding cash or keeping large sums of cash in their homes. There are, as you would imagine, a number of potential consequences here that we should be aware of,” she said.
Some bank officials however believe that a cost analysis based purely on net interest misses the bigger picture and that negative rates could actually help to support growth and prevent defaults that banks would be forced to absorb.
The main loss for the big five banks through negative interest rates would be through reduced net interest income but estimates suggest that updating IT systems to handle the negative rates would cost them between £50 million and £100 million alone.