Latest BoE Report : Legacy Banking Arrangements Costing UK Businesses
Latest BoE Report : Legacy Banking Arrangements Costing UK Businesses
February 2025:
The latest Bank of England data highlights continued concerns for UK businesses: The effective interest rates on corporate banking arrangements remain misaligned with the higher base rates in 2024. This persistent disparity underlines that businesses can improve profitability by updating legacy banking arrangements. With interest rates likely to remain higher for longer this is an issue that must be addressed by Finance and Treasury teams to avoid lost interest margins. Even though the base rate has been lowered by the Bank of England in recent months market expectations are that interest rates will continue on the high side for the longer term. On the 17th February 2025 the yield on the UK 10 year Treasury Rate was over 4.5%. These movements will have a big impact on corporate cash yields and corporate borrowing costs.
Key Insights from the Latest Data
The Bank of England’s effective interest rates for December, published on 30th January 2025 reveal a modest rise across various deposit and loan categories:
● Sight Deposits: Rates decreased from 2.59% in November to 2.58% in December. This return remains well below the level corporate customers could achieve through more competitive arrangements.
● Time Deposits: Rates fell from 4.28% to 4.19%, reflecting anticipated declines in market rates.
● Loans: Effective rates dropped marginally from 6.61% to 6.58%, 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 0.01% from 2.59% in November to 2.58% in December.
- The effective rate for time deposits decreased by 0.09% from 4.28% in November to 4.19% in December.
- The effective rate for loans decreased by 0.03% from 6.61% in November to 6.58% in December.
Effective interest rates for: PNFC’s on new deposits and loans:
New business
- The effective rate for time deposits decreased by 0.01% from 4.22% in November to 4.21% in December.
- The effective rate for loans decreased by 0.27% from 6.56% in November to 6.29% in December.
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 January 2025
