Regulated savings in Belgium: Impacts of today's floor interest rates
The total cost of regulated savings remuneration for Belgian banks could have decreased with € 1,76 billion in 4 years, a 60% decrease. However, falling interest rates are squeezing the net interest margin and consequently banks' net banking product. Smaller banks seem to struggle more than bigger banks from their squeezed margins.
The Belgian Savings Landscape
Belgians are known to be amongst the world's most fervent savers. A new record of more than € 600 billion in bank deposits was broken in the fourth trimester of 2014, a 100% growth in 15 years (cf. Figure 1).
This total amount consists mainly of current deposits (€217 billion) and regulated savings (€255 billion). The remaining € 128 billion is spread out over Short-Term and Long- and Medium Term deposits, as well as over other (non-regulated) deposits (cf. figure 2). By way of comparison, the total financial patrimony of Belgian families is estimated at around €1.000 billion.
Cost of Regulated Savings Deposits for Belgian banks
A significant fall in interest expenses despite growing deposits
Latest years have been characterized by falling interest rates (cf. Figure 3). Since April 2011, ECB Fixed Rate Tenders have fallen from 1,25% to 0,05% with effect from 10 September 2014 and rates on Deposit facility are already negative (-0,20%) since 11 June 2014.
Based on analysis of base rates and fidelity premiums on regulated savings deposits of the top-15 biggest banks operating in Belgium, Sia Partners estimates the total cost saving around € 1,76 billion over the last 4 years. This represents a saving of 61,2% of the 2011 interest costs. The annual cost savings are distributed in a relatively linear way over the 4 years with cost savings of € 0,54 billion between 2011 and 2012, a high of € 0,64 billion in 2012-2013 and another € 0,58 billion in 2013-2014 (cf. Figure 4).
It is doubtful however that this trend will persist in 2015 and thereafter, given the floor-interest rates of today and the ECB's efforts to boost the European economy by a European QE program. Sia Partners estimates an additional cost decrease in 2015 of around € 0,27 billion, based on growth projections of outstanding amount and actual or projected interest rates on regulated savings deposits for 2015.
Which banks benefit from those cost savings on interest expenses?
Main benefiters of last years' interest cost savings seem to be the smaller / medium-sized players of Top 15 Belgian banks. Those were able to take over 67% of non-Top 15 players in the Belgian market, while the status quo was maintained for the "Big 4" in the Belgian banking sector. The reason is that lower rates not only cause cost savings but affect both sides of the income statement and thus cause a squeeze in banks' net interest margin. This effect might be more pronounced with smaller banks, especially with those using high-yield savings accounts to compete with bigger players. Indeed, floor interest rates are making their business model less viable. Consequently, a consolidation phenomenon occurs beneath the Top 15 banks in the Belgian banking sector, causing non-Top 15 banks to struggle for viable market share (cf. Figure 5).
Despite falling interest rates, outstanding amounts on regulated savings accounts have risen with almost 17,5% since 2011, to reach a record level of about € 250 billion end of 2014. At the same time, yields on regulated savings deposits have decreased significantly during the last 4 years.
Sia Partners analyzed those trends and estimated the cost savings for banks on interest expenses related to regulated savings deposits at € 1,76 billion over the last 4 years.
On the other side, falling interest rates are squeezing the net interest margin and consequently banks' net banking product. It seems to be particularly the smallest players, with business models based on high-yielding savings accounts that struggle the most to remain profitable and to defend their market shares.
Download the full article on the new cash cycle model in Belgium here.
Hypothesis: Fidelity Premium applies on 90% of regulated savings deposits (impact of fidelity premium quite low: if hypothesis of a Fidelity Premium applying on, for example, 50% of deposits, the estimated cost savings would be adjusted downwards by only 10-15%), according to Sia Partners calculations.
Those account for > 97% of total outstanding on regulated savings deposits in 2014
From 2011 till 2014