Welcome to the latest edition of our weekly personal finance newsletter, On The Money. This week we turn our attention to a subject close to the heart of those who have been able to put some money aside despite the rising cost of living.
Irish banks have been getting it in the neck recently over the miserly interest rates they are offering savers – and with some justification.
Data from Standard & Poor’s showed that Irish banks have passed on just 7 per cent of the cumulative impact of European Central Bank increases to those leaving money on deposit with them between the time the ECB started ratcheting up rates last July and May of this year. In that time, the rate the ECB paid banks for surplus cash that they had on deposit at the Central Bank moved from 0 per cent to 3.25 per cent. It has since risen to 3.75 per cent.
The 7 per cent figure showcased Irish banks as the most miserly, with Slovenia of all countries in the euro zone as well as the UK and the US. Savers across the euro zone got the benefit of an average of 20 per cent of ECB rate rises over the same period while those in the UK got 43 per cent of the rate increases announced by the Bank of England. The US data refers to a slightly different period – the 12 months from March 2022 when the Fed started raising rates – but again savers were better treated, with a quarter of all increases passed on to them.
The Irish banks have made – and continue to make – much play of the fact that on the other side of the coin, they were much slower than their European peers to pass on ECB rate rises to mortgage holders. Does this hold water?
To an extent, yes, at least if you leave aside the significant portion of homeowners paying tracker mortgages who have certainly – and reasonably – borne the full brunt of the rate rises. Initially at least, the banks kept their fixed and variable rate loans unchanged although some non-bank lenders offering the best fixed deals at the time withdrew these from the market. The difference for them is that they were not drawing on a pool of savers’ cash but borrowing in the money markets.
But rates did start to rise after the second ECB rate hike (we’ve now had nine) and the gap with other euro zone states has narrowed since. By May, according to Central Bank figures, Irish lenders had passed 31 per cent of ECB rate hikes (or 1.16 percentage points) on to new home loan customers. This compared to 1.77 percentage points (or 47.2 per cent) on average across the euro zone. Since then, it has narrowed further.
To get a snapshot of the position for existing mortgage holders, I looked at the three-year fixed rate on offer from AIB for homeowners who had more equity in the homes – a loan to value of between 50 and 80 per cent, rather than the 80 per cent plus you would expect with new mortgage customers. The increase here was 1.65 percentage points – from 2.45 per cent back in June 2022 to 4.1 per cent now.
For these customers, AIB was passing on closer to 44 per cent of the ECB rates rises to that point.
So savers were getting just 7 per cent of the benefit while the banks charged mortgageholders 31 per cent of higher rates on average – and much more in some cases. That amounts to a no risk surge in net interest margin for the banks.
Little surprise then that Bank of Ireland announced a pretax profit of €1 billion for the first half of the year, with net interest income increased by 68 per cent. Bank of Ireland had €33 billion of excess cash stored with the Central Bank on behalf of the ECB at the end of December.
AIB posted net profit of €854 million for the first half of the year, “materially in excess” of target and up 79 per cent from the same period in 2022. Its net interest income jumped 98 per cent year on year and will, it now expects, top €3.6 billion in the full year. It has €31.2 billion of excess deposits currently earning an annualised €1.17 billion, stored with the Central Bank.
Those excess deposits translate as money deposited with the bank by savers which the banks have not or cannot lend. Those sums have grown as the household savings rate surged from 12.2 per cent back in 2019 in advance of the Covid-19 pandemic to 24 per cent at the end of last year, according to CSO figures. It has since pulled back to about 14 per cent as families juggle with the pressures of falling real wages and a rising cost of living.
So what should you do with the money you have sitting in an Irish bank earning little or nothing?
Irish savers are generally risk averse. We’re slow to invest in equities and other more exotic options. We appear to be equally reluctant to look abroad in search of better rates for our savings... but we should.
The UK option is no longer available to Irish savers post-Brexit, with banks there no longer willing to open new accounts unless you are based in the UK. A number of the UK lenders have allowed those with existing UK accounts to retain them – for now at least.
But for the rest, it is essentially a case of trawling across the euro zone for savings options.
The best rates currently available in the main Irish banks appears to be 1.75 per cent at Permanent TSB if you lock your money in for a year, and 2 per cent per annum at all three banks if you are happy to leave it locked in for two years.
But you can do better – much better in relative terms.
Germany’s Raisin Bank acts as a marketplace for deposit rates and allows savers to shop around a wider range of European banks for the best rates.
As of now, if you have €5,000 in saving that you can put into a one-year fixed term deposit account, you can secure a rate of 4.21 per cent with Latvian bank, BluOr. Banks in Italy, France and Slovakia also offer rates in excess of anything available here.
Price comparison site, Bonkers.ie, says Portugal’s Banco Português De Gestão is also competitive for one-year fixed deposits through Raisin.
If you fix for two years, Italy’s Banca Privata Leasing will offer you an annual rate of 3.83 per cent, with BluOr, France’s Yonited Credit and Slovakia’s PrivatBanka also topping Irish offers.
If you don’t want to lock those savings away, on the demand deposit side, Dutch lender Bunq now has an operation in Ireland, currently offering up to 1.56 per cent on savings.
All say that deposits are covered by local deposit guarantees up to €100,000 but clearly anyone looking to avail of such offers would need to examine the specific Ts&Cs attached to the accounts, not least as some of the rates and banks offered differed when I consulted Raisin and Bonkers.ie, which clearly raises a question. All told, Raisin offers Irish savers access to nine European banks, including others from countries including Austria, the Czech Republic and Poland.
Obviously, any interest you earn as an Irish resident is subject to Dirt tax – as it would be with the lower rates on offer domestically. You may also be taxed locally, in which case the Irish tax authorities will allow you a credit against your Irish tax bill.
You could argue that we are worrying too much about the people who have, and not enough about those who do not. It is certainly true that for those who do not have the luxury of saving, things like energy rises and the continuing increase in the price of food over the past year – up by 8.8 per cent, according to the CSO, or by 13 per cent as measured by the Kantar supermarket survey (both well in advance of the headline rate of inflation) – other areas have priority.
However, that does not mean banks that are now reporting Celtic Tiger era profits should be let away with gouging their customers. Until such time as they see their depositors’ money flowing elsewhere, however, there’s little incentive for them to change.
You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed last week’s newsletter, you can read it here.
