Although last September Christine Lagardepresident of the European Central Bank (ECB), hinted that there would be no more cuts in interest rates at least until December, the entity announced this Thursday a new reduction of 25 basis points (0.25%), reaching 3.25%.
Two reasons explain the change in criteria from the ECB: September closed with inflation of 1.8%a figure that is below the 2% limit that Lagarde herself set in June 2022 as a priority objective so that the official price of money began to drop sharply; on the other hand, the weak economic activity that France and, above all, Germany are showingthe two main economic engines of the European Union, has also influenced the decision.
Whenever there is a drop in interest rates —this is the third since last June— A question inevitably arises: How does it affect families and the mortgage market? Few wonder, however, If the decline in rates has any negative impact on the big banking business.
If the big banks benefit the most when rates rise, it is logical to think that when the downturn comes they will lose money. Last year The large Spanish banks obtained a joint profit of 26,000 million eurosthanks largely to the fact that pocketed 85,000 million euros in the collection of interest from companies and families. A drop in rates suggests that this figure will not be repeated either this year or in future years. Spoiler: the bank never loses, in any case it stops winning. Second spoiler: what is going to happen is the opposite; The bank is going to earn more than ever.
In addition, there is another loophole through which money can go to the banks: The ECB has also cut the deposit facility rate by 25 basis points and left it at 3.25%. This is the interest rate that the ECB pays banks on the deposits they hold at the central bank. A reduction means that banks will earn less by keeping their funds at the ECB.
Why the bank always wins
However, despite this apparently adverse scenario, The six large Spanish banks will break profit records in 2024. In fact, In the first six months of this year they earned 15,287 million eurosan amount never seen before, and everything indicates that 2025 will be even better, with a new profit record included, according to what it points out Carlos Sánchez Mato, professor of Economics at the Complutense University of Madrid and banking expert.
How is this possible apparent contradiction? Sánchez Mato explains that the large Spanish and European banks have been “concerned” for some time and were already preparing for lower rates on several fronts.
The first of these fronts are mortgages. Since the ECB began to raise rates rapidly in June 2022, clients began to take out fixed-interest mortgages. The market was filled with aggressive offers and now, as Sánchez Mato points out, “we find ourselves with many mortgages anchored at fixed rateswhich now seem low to us, but in a year, as the ECB lowers them, they will seem exorbitant.” “The big banks are going to compensate for a lot of income,” adds Sánchez Mato.
There is a second front which is that of the public debt market. Sánchez Mato explains: “The States issued public debt in considerable quantities to face the crisis derived from the pandemic and inflation. This debt was contracted by the States at very high rates. The securities were fundamentally purchased by the ECB and by the banks. And now the big banks have filled their balance sheets with that public debt, because it is a kind of life insurance due to its high interests.”
With public debt securities the banks They have two options, and both are very profitableexplains Sánchez Mato: “They can charge those high interests for years or they can sell that debt to third parties, thus obtaining great profits.”
The third front that guarantees money and benefits to banks is the remuneration it pays its clients for deposits and savings. Interest rates closed 2023 at 4.5%, their highest since 2001, and Spanish banks have proven to be experts in making them profitable. Spanish banks base 81% of their operating income on interest margin: It is the difference between the interest they charge for granting credit and the remuneration they give for their clients’ deposits and savings. No one in Europe exhibits such a high margin.
In this sense, Sánchez Mato points out that Spanish banks have already begun to undo the path taken during the last two years: when they began to raise interest rates, the yield on deposits was almost zero; As rates rose, banks also increased the yield on their deposits up to achieve an average profitability of 2.6% this summerits highest level in years, but always below official interest rates. The path that the bank is going to follow is very predictable: lower the interest it pays to its clients on deposits and savingsand thus continue winning, as always.
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