Bank accounts for profits

Savers are losing interest

There's good news for shareholders in the banking sector: UK banks are reporting bumper profits for the past year.

Savers might be less impressed.

Barclays kicked of the reporting season of UK banks with a 42% rise in profits. Abbey National followed reporting record results, profits rose 17% to top £2bn, and Lloyds TSB's profits were up 7%. Royal Bank of Scotland, which acquired Natwest, reported results up 25% but HSBC topped the lot with a 28% rise to a huge £7.1bn profit.

The results follow the Bank of England quarter point rate cut in mid-February and has exposed how interest on savings accounts fell long before that on mortgages and loans.

Once again, this has left the banks open to charges of profiteering.

Halifax, HSBC and Abbey National immediately matched the Bank of England with a cut to their mortgage rates - but that still leaves a lag, in some cases of several months, from when savings rates came down before Christmas.

The banks blame their earlier cuts of savings rates on changes in the retail market conditions.

A spokesman for Nationwide said they cut both rates in December because people were saving more and they had to offer cheaper mortgages to lend those savings out.

Making a profit

If banks paid the same amount of interest on savings as they charge on their mortgages, they'd lose money.

Phil Middleton, Head of Banking Strategy at KPMG

Banks make part of their profits from what is called interest rate mis-matching.

When the Bank of England raised its rates by 0.25% in February 2000, most big institutions raised their mortgages by the same amount.

Savings rates, however, rose only fraction of this and often take some time to be passed on. When rates fall the opposite happens.

"You can't say that banks are making enormous profits because they're cutting savings rates. Banks are not charities, they have to make a profit as a duty to their shareholders," says Phil Middleton, Head of Banking Strategy at KPMG.

"If banks paid the same amount of interest on savings as they charge on their mortgages, they'd lose money."

The banks say they need to take a margin because they have to pay for their infrastructure and to cover the risk that money they lend may not be repaid.

Watching the banks

The conflict of their duty to the shareholders and to their customers was highlighted a year ago by the government inquiry into banking practices.

Don Cruickshank, who compiled the report into the UK banking industry, said at the time: "There are real problems with the way banks control the networks which allow money to flow around the economy, whether it be cheques, credit and debit cards, or electronic transfers, big and small."

Mr Cruickshank was particularly critical of the four big High Street banks - Barclays, NatWest, HSBC and Lloyds TSB - which dominate the market for personal accounts.

However, Mr Cruickshank did not address the issue of interest rate mis-matching.

More cuts for savings accounts could come

A spokesperson for financial information service Moneyfacts said the biggest problem was that many banks have already cut their savings rates in anticipation of an interest rate cut.

The Scarborough Building Society has cut its rates by 0.8 percent over 2000 while cutting mortgages by only 0.25.

Moneyfacts say they will be watching closely to see if savings accounts face even lower returns.

Banks do not publish figures that show their profit from rate mis-matching.

"It would be difficult calculate how much profit they make from the cuts on savings rate, even if you were sitting inside the bank", say Phil Middleton.