UK banks and negative interest: money for less than nothing

The upheaval at HSBC has underscored banks’ poor prospects. Negative interest rates won’t make things any easier. Matthew Partridge reports

Three months ago HSBC announced what many considered to be “the biggest overhaul in its 155-year history”, says Doug Alexander on Bloomberg. Now the fallout from the virus is forcing it to consider “more drastic measures”. While the crisis forced it to postpone plans to “cut 35,000 jobs,$4.5bn in costs and $100bn of risk-weighted assets”, the board is now pressing executives to “restart the overhaul” as well as consider “even more dramatic changes”. This could include more cuts, or even a possible sale of its US business and its retail network in France.

It’s not surprising that HSBC is thinking about even deeper cuts, say Stephen Morris and Laura Noonan in the Financial Times. The shares “now trade at their lowest in more than a decade”. The bank is dealing with retail investors in Hong Kong who are still “furious” about the fact that, when the crisis started, the Bank of England forced HSBC to cancel its dividend for the “first time in 74 years”. The US operations are also a logical target given that they made a return on tangible equity of just 1.5% last year, compared with 15.8% in Asia and 12% in the Middle East”.

Why big is better

Despite its woes, global banks such as HSBC and even larger British institutions like Lloyds and RBS are in a better position than smaller institutions, such as Virgin Money and Metro Bank, says Liam Proud on Breakingviews. This is because the Bank of England has indicated that it is looking “with somewhat greater immediacy” at the idea of negative interest rates. Such a move could reduce smaller banks’ margins on personal and commercial loans, which account for around 90% of their income.

The large players, however, also get money from “investment banking, wealth management and other fee-based products”. There could end up being “a roll up of smaller players”. Not so fast, says Camilla Canocchi on This Is Money. The risk of deflation and a recession means that the Bank of England is certainly more open to the idea than in the past. However, its chief economist, Andy Haldane, has stated that they are still “not remotely close” to a position where they are confident enough to actually carry it out. The Bank says it will only implement negative interest rates if it is satisfied about their potential impact on banks and the economy. 

What’s more, even if negative rates are brought in, they may not turn out to be so bad for lenders after all, says The Observer. By making borrowing extremely “attractive” they might encourage nervous households that “might not have taken a loan to buy a car or new kitchen” to go ahead with a purchase, boosting lending volumes. Provided the Bank of England is willing to support banks by letting them borrow at an even lower negative rate, there should therefore be scope “to maintain profit margins and stay profitable”. 

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