Despite ING’s withdrawal from the mass consumer market, the situation of Luxembourg’s retail banks is not a cause for concern. The rise in interest rates has led to a sharp increase in their interest margin, i.e., the difference between interest received and interest paid. Between 2022 and 2023, this margin rose from €6.8bn to €10.27bn (+50.9%), according to the Luxembourg Financial Sector Supervisory Commission (CSSF). This trend is set to continue in the first quarter of 2024, with an increase of 18.6% compared with the first quarter of 2023.
For customers, the rise in rates has meant slightly higher interest rates on deposits, but also--and more importantly--more expensive loans. Does this mean that the rise in rates has not been borne by the banks, but by customers? For the Luxembourg Consumer Protection Association (ULC), there seems to be no doubt. “If banks were a little less greedy when it came to interest margins, many customers would certainly suffer less”, argued ULC chair Nico Hoffmann.
Banks should offer fair and affordable credit terms
One of the ULC’s demands is to improve credit conditions. “Given the record profits, banks should offer fair and affordable credit terms to their customers, for example by offering a lower interest margin”, the organisation said. It pointed out that “financial institutions can set loan interest rates independently of European Central Bank (ECB) interest rates”. The ECB announced its last month.
Hoffmann said that it is “simply unacceptable” that "banks often do not react as quickly, if at all, to ECB rate cuts in the interests of their customers”. The consumer organisation is calling for banks to be obliged to pass on future ECB rate cuts to their customers as quickly as possible, “just as they do in the event of a rise in the key interest rate--at least as far as interest rates on loans are concerned”. All the more so as “banks should lose no time in adapting savings rates downwards”.
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Long-term approach
Faced with this criticism, the Luxembourg Bankers’ Association (ABBL) wants to respond by “educating”. “No retail bank looks for short-term profit”, said ABBL CEO . “In this business, the aim is to develop a long-term relationship with the customer. This means financing a wide range of life projects--such as buying cars, furniture or a home--or opening savings accounts for children. This translates into stable margins, but generally lower than those of other banking activities.”
Retail banks, which derive a large part of their income from interest, have suffered from the prolonged period of low or even negative interest rates. “They hold large amounts of liquidity because of the deposits entrusted to them by their customers”, Grbic explained. “With the regulations, not all of this liquidity can be used to grant loans: it has to be placed with central banks or on the interbank market. When interest rates were negative, this came at a cost to the banks. At current rates, these investments yield around 4%. They are therefore once again earning interest at levels that are in line with historical averages”.
Gradual return to normal
The jump in “interest margins” on the banks’ balance sheets can therefore be explained essentially by the fact that the banks are no longer paying interest on these investments, but are receiving it. “On the other hand, margins on customer-related transactions--such as lending--have remained broadly stable,” stated Grbic. “Let’s not forget that during the period of negative interest rates, retail banks did not charge negative interest to their customers.” And if the income generated by these replacement operations remains high in the first half of 2024, the ABBL is talking about “a gradual return to normal”.
Another message from the ABBL is that it is crucial for financial institutions to be profitable. “A bank that suffers losses sees its capital eroded, which can limit its ability to grant loans because of regulatory constraints”, Grbic pointed out. “Profitability is therefore not just a question of shareholder returns, but above all a question of financial stability and the ability to finance the economy in the long term. Moreover, when a bank wants to set up in Luxembourg or develop a new business, profitability is one of the criteria assessed by the regulator.”
Rate cuts cannot be passed on directly to customers.
How will the banks pass on the ECB’s rate cuts? Once the decision has been announced by Frankfurt, the pace of transposition depends first and foremost on the banks’ internal governance. This involves a number of internal committees that meet at regular intervals, but differ from one bank to another.
“This is both a commercial and a strategic decision”, explained Grbic. “The bank will consider the market’s reaction, its asset and liability positions, etc. Because of the decisions to be made, but also the technical and reporting processes to be put in place, these rate cuts or rises cannot be passed on directly to customers”.
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Once a decision has been taken, customers have to be informed a month before it comes into force. The head of the ABBL expects the banks to pass on the cut “towards the end of July or August”. Some have already done so: Spuerkeess rates by 0.50% on variable-rate loans--particularly mortgages--on 1 July. Rates on savings products will follow this adjustment, the bank said.
Variable rates between 3%-4%
Customers will see a reduction in rates “on both assets and liabilities”, Grbic said, except for those with a fixed rate. “The sharp rise in interest rates means that today, two-thirds of mortgage rates in Luxembourg are fixed, whereas traditionally the preference was for variable rates. This means that the risks associated with rate variations are now reduced for borrowers.” As for variable rates, he expects rates of between 3% and 4% for the months and years ahead--“a more stable outlook, which allows people to project themselves better into the future”.
The minister of finance, (CSV), congratulated the banks----that have already passed on the reduction in rates to borrowers on 8 July 2024. These announcements “reduce the financial burden on households and businesses concerned”, Roth told MP (déi Lénk). But Roth stated “that it is not up to the minister to intervene in the commercial policy of a bank”.