Latest BoE Report : Bank Interest Margins Stay Elevated
Latest BoE Report : Bank Interest Margins Stay Elevated
Monday 7th April 2025
The latest Bank of England Statistical Release on effective interest rates shows that small movements in short term market interest rates are feeding through to the banks customers.
This data continues the narrative that businesses pay too much for their banking services, largely because the banks do not pro-actively pass on the benefits of their higher interest rate margins.
According to Bankhawk data, many companies fail to identify large profit leakages from their banking arrangements for two main reasons. Firstly, legacy banking systems make it difficult for companies to optimise their banking and payments arrangements. Secondly, incumbent banking providers do not proactively inform their customers of opportunities to optimise their banking arrangements because obviously it will hurt the banks own profitability.
Of more concern for CFO’s and Treasurers should be heightened credit risk of bank funds over the past week. It is notable that prior to the banking crisis in 2008 there were successive falls in bank share prices. Whereas the crash in 2008 was precipitated by a housing bubble, in early 2025 many experienced commentators were talking about a stock market bubble and a pending economic downturn.
Over the past week there have been dramatic falls in bank share prices and more regular phone calls between the Bank of England and bank executives.
Apart from addressing the profit leakages above Finance Leaders need to focus also on risk and ensure that the return on bank funds takes into account the higher credit risk levels.
Key Insights from the Latest Data
The Bank of England’s effective interest rates for January, published on 7th April 2025 reveal a modest rise across various deposit and loan categories:
- Sight Deposits: Rates decreased from 2.57% in January to 2.46% in February. This return remains well below the level corporate customers could achieve through more competitive arrangements.
- Time Deposits: Rates fell from 4.15% to 4.02%, reflecting anticipated declines in market rates.
- Loans: Effective rates dropped marginally from 6.51% to 6.38%, indicating lower borrowing costs for businesses. These rates remain high which will be a concern for companies with high borrowings.
The net interest margin for banks remains elevated. Businesses with legacy banking structures are not benefitting from the higher interest rate environment generally.
Addressing the Disparity
The gap between the returns businesses receive on bank funds and the rates they pay on borrowings underscores the need for proactive financial management. Companies actively reviewing and renegotiating their banking relationships achieve significantly better outcomes. For instance, Bankhawk’s benchmarks show that optimally structured banking arrangements can generate significantly improved profitability.
The Path Forward
To mitigate this growing issue, businesses should:
- Benchmark Current Arrangements: Understanding how your effective rates compare to market averages is a crucial first step.
- Engage in Active Negotiation: Leverage data to secure better terms on both deposits and loans.
- Adopt a Proactive Approach: Regularly review and adapt banking strategies to remain competitive.
The latest figures reiterate the importance of taking action now. With banks increasingly profiting from widened net interest margins, businesses must ensure their financial strategies are optimized to safeguard their profitability.
PNFCs deposits and loans
A PNFC is a private non-financial corporation.
Effective interest rates for: PNFC’s on stock outstanding of deposits and loans:
Outstanding facilities
- The effective rate for sight deposits decreased by 0.11% from 2.57% in January to 2.46% in February.
- The effective rate for time deposits decreased by 0.13% from 4.15% in January to 4.02% in February.
- The effective rate for loans decreased by 0.13% from 6.51% in January to 6.38% in February.
Effective interest rates for: PNFC’s on new deposits and loans:
New business
- The effective rate for time deposits decreased by 0.19% from 4.09% in January to 3.90% in February.
- The effective rate for loans decreased by 0.27% from 6.47% in January to 6.20% in February.
Table: Effective Interest Rates paid/received on PNFC balances by UK MFI’s (excluding Central Bank)
Per cent – Not seasonally adjusted
Source: Bank of England – Statistics – Published March 2025
