Net interest margins: Big banks make £7bn extra on low savings rates

High Street banks made £39.9bn from the widening gap between low interest rates on savings and the high interest rates charged to mortgage and borrowers, new figures show.

This is Money analysis of the big banks’ results showed they made an extra £7 billion last year on net interest margins – the difference between the rates they pay to savers and those they charge to borrowers.

These new findings show at full scale how Barclays, NatWest, Lloyds, HSBC and Santander are making more money by passing on Bank of England rate hikes to borrowers – but not savers.

Last year, the Bank of England raised its base rate from 0.25 percent in January to 3.5 percent in December. The base rate is now 4% and the big banks have added an extra £7bn to their revenues by passing more of this on to borrowers than to savers.

Large banks take into account the basic rate for the financial products that consumers take out. Due to increases in the base rate, savers earn more, but borrowers pay more.

But savvy consumers will have noticed that they currently pay 4 to 6 percent on most mortgage rates, while savers with easily accessible deals from major banks are earning atrocious rates of 1 percent or less.

The best savings rates, often offered by smaller banks or building societies, pay much more than this, with the most accessible savings rates exceeding 3 percent.

Major banks’ 2022 results, all now published, confirm that banks are making more and more money from the difference between what they pay to savers and what they charge to borrowers.

That difference is called the “net interest margin” by banks – and it grows rapidly for any lender. It came in at an additional £7 billion by 2022.

How banks bring in a rising base rate

Lloyds Banking Group, the UK’s largest banking giant, includes Lloyds Bank, Halifax and Royal Bank of Scotland.

These banks had a net interest margin of 2.94 percent in 2022, according to today’s annual figures of the group.

Lloyds Banking Group earned £13.1 billion from this in 2022, an increase of 18 per cent or £2 billion from 2021.

Barclays UK earned an additional £691 million from its own net interest margin, which increased from 2.52 per cent to 2.86 per cent from 2021 to 2022. The amount the bank earned from this was £5.2bn in 2021 and £5.89bn in 2022.

For NatWest Group, which includes NatWest, Royal Bank of Scotland, Ulster Bank and Coutts, the net interest margin in 2022 was 2.85 percent, up from 2.3 percent in 2021.

Everyone is on it: all the big banks are making more money from the widening gap between interest rates on savings and the cost of borrowing

What that means is that the banking group made an extra £2.3bn from the widening gap between poor savings rates and the interest it charges borrowers.

The banking giant earned £7.5bn from this in 2021, rising to £9.8bn in 2022.

Santander UK made an additional £475 million from the gap between its own savings interest and loan repayments.

The UK arm of the Spanish bank earned £4.4 billion in 2022, with a net interest margin of 2.06 per cent, compared to £3.9 billion in 2021 with a net interest margin of 1.92 per cent.

HSBC UK’s net interest margin was 1.89 percent in 2022, compared to 1.53 percent the year before.

HSBC’s UK arm earned £6.2bn from this in 2022, £1.6bn more than the £4.6bn it made in 2021.

The bank even noted that its earnings have been “driven by strong net interest income growth.”

Banks say ‘savers don’t want better interest rates’

Big bank bosses recently told MPs that savers don’t want better rates on easily accessible accounts – by far the most common savings deal in the UK.

According to the British bosses of Barclays, NatWest Group, HSBC UK and Lloyds Banking Group, they said consumers want to be encouraged to save with much less common regular savings deals.

Ordinary savings accounts are special savings deals, usually reserved for current account customers from banks.

They often have higher interest rates than easy access accounts, but they limit the amount that can be saved each month.

The rate is often reduced if money is withdrawn during the term of the account.

Is this getting better or worse?

Unfortunately, things look set to get worse for consumers this year – and better for banks. At least, that’s what the banks think.

Barclays and Lloyds both forecast their net interest margins to exceed 3 percent this year, meaning savers will be under further pressure while borrowers suffer.

To be fair to the banks, some lenders point out that their net interest income isn’t just about saving versus borrowing.

Some lenders also have financial widgets called “structural hedges” that affect their net interest margins.

These hedges are designed to smooth out the impact of base rate changes on customers.

What the banks say

A spokesman for Santander said: ‘We have worked hard to ensure that our products provide real value to our customers. We introduced market-leading savings and Isa rates and last fall offered double cashback on energy bills.

“We know that the rising cost of living has affected our customers and we are determined to support those who are struggling.

“We’ve expanded our financial support team to 600 colleagues, and we’ve proactively identified and contacted more than 2.5 million customers who showed signs of financial strain and directed them to available support.”

Speaking to analysts and journalists about Barclays’ results, the bank’s chief financial officer, Anna Cross, said the bank’s borrowers are influenced by more than just base rates.

Cross said: ‘When we provide mortgages to customers, we don’t lend at base rates.

“We’re borrowing at a much longer term than that and that cost to us, and to the rest of the industry, went up a lot in October. Since then they have fallen and we have passed on the benefit of that cost reduction to our mortgage customers.’

A spokesman for HSBC said the bank had increased its Premier Savings, Flexible Saver and Online Bonus Saver deals and lowered mortgage rates.