CRÉDIT Mutuel is not the kind of bank the world pays much attention to, but the profit and loss account of France’s fifth-biggest lender is instructive. Last year it made a net 2.5bn euros, 4pc more than it did in 2015.
One reason? In October 2015, Crédit Mutuel began charging its customers for managing their current accounts. The move helped the bank offset a 1pc decline in its interest margin with an 11pc increase in fee income, fuelling that profit boost.
Until recently, France — like the UK and a handful of other countries, including India and Australia — kept up a reluctant tradition of providing bank customers with free current account services, provided they stayed in credit.
In times of ‘normal’ monetary policy, the practice worked fine. Banks would use the funds deposited in accounts, on which little or no interest was payable, as a cheap source of loan finance. Typically, a bank in a developed economy could expect to generate an interest margin of 3 or 4pc in the process.
But we are no longer — and have not been for some time now — in anything like normal times for monetary policy. Three weeks ago, Mario Draghi, president of the European Central Bank, unveiled yet another loosening of policy. The measures included a cut to zero in the ECB’s base rate, and to minus 0.4pc in the rate payable on banks’ deposits with the ECB.
The shift leaves the UK as the biggest developed market banking system still with a free banking model — something that regulators have bemoaned as a contributory factor to the mis-selling scandals that have plagued the sector
In the US, hopes that the interest rate cycle had turned were sparked when the Federal Reserve raised rates by a quarter of a point in December to a new range of 0.25-0.5pc. But economic and markets developments since have skewered expectations that a succession of rises will follow any time soon. In December, the Fed suggested there could be four rises in 2016; now it is pointing to two.
A purist analysis would suggest that the actual level of base rates should not matter for banks’ margins — no matter what a bank has to pay for its funds, it should be able to charge a certain amount more for the money it lends out. But that simplistic view of the banking model breaks down at times of ultra-low or negative interest rates.
Some banks, such as UBS and HSBC, have managed to pass on negative rates to their institutional clients without a dangerous outflow of funds. But financiers reckon that trying the same with retail customers would be reckless. “It’s just not possible,” says one European bank boss. “Everyone would just take their money out. You would get a bank run like you did in Greece.” With banks unprepared to take that risk, net interest margins are getting squeezed.
Last year, the margin in the US banking system was barely 3pc, a fifth lower than six years ago. The pressure in Europe is even more severe. The effect of the eurozone interest rate cut on banks’ profitability might be softened by the ECB’s expanded asset-purchase programme and free targeted longer-term refinancing operation, or TLTRO, for business and consumer lending. But analysts at Morgan Stanley still predict eurozone bank earnings will fall by 5-10pc this year.
Which is why it is worth remembering the case of Crédit Mutuel. Cognisant of the difficulty of passing on negative rates to its customers, it instead started charging them a monthly fee for managing their accounts. Among France’s big banks, it was one of the early movers. As of this year, BNP Paribas and Société Générale — the country’s Big Two — have followed suit. According to the CLCV, France’s consumer association, more than 85pc of banks now charge current account fees.
The shift leaves the UK as the biggest developed market banking system still with a free banking model — something that regulators have bemoaned as a contributory factor to the mis-selling scandals that have plagued the sector. In the most infamous example, banks tried to prop up low interest margins with high-margin and often inappropriate payment protection insurance.
With UK base rates expected to stay at a record low of 0.5pc for another three years or more, the pressure on interest margins will not abate. Banks would love nothing more than to be able to charge customers for managing their current accounts. No one, though, is prepared to go first, for fear of losing customers. France’s experience suggests it may be easier than they think.
Published in Dawn, Business & Finance weekly, April 4th, 2016
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