UK banks/FCA: slowing beta is already keeping the alpha at bay

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Give a man a gun and he can rob a bank. Give a man a bank and he can rob everyone, the gendered old joke goes. That seems to be the assumption of the Financial Conduct Authority in summoning UK bank bosses for a grilling on Thursday.

It is not lending practices or mis-selling scandals that have raised official eyebrows this time. The issue is why customers are apparently getting so little on deposits compared with the rates they pay for loans.

Compare apples with apples — rather than instant saver accounts with mortgage fixes — and the gap shrinks. A fixed two-year cash Isa with Lloyds yields 5 per cent. Two-year fixed mortgage rates are about 6.4 per cent.

Nor are Britons doing badly compared with continental peers. In the UK, deposit betas — the proportion of rate increases passed on to savers — average about 40 per cent, double the eurozone average. That is a function of greater financial awareness, says Andrea Filtri of Mediobanca. Betas on UK time deposits are closer to 80 per cent.

The row over bank “profiteering” is unlikely to have much practical impact. The high summer of higher bank profits is turning autumnal. The Bank of England raised base rates to 5 per cent last month. But greater pass-through to savers shows that net interest margins have already peaked. Indeed, downsides from higher rates will mark the next stage of the cycle.

Lending growth is contracting, dragged down by fewer mortgages. Bank liquidity needs are thus likely to be lower, not higher. Lloyds’ loan-to-deposit ratio was already under 100 in the first quarter. A similar situation exists on the continent.

Smart savers are now finding better deals outside banks; net drawdown of household deposits was £4.6bn in May, the most on records that began in 1997.

Returns on tangible equity are expected to peak this year at Lloyds and NatWest, according to forecasts service Visible Alpha. Stock valuations are stuck at steep discounts to book value. That means returns which cover capital costs — a first since the financial crisis — will not last.

The moral re-education session for bank bosses at the FCA will not only miss the point. It will have missed its moment.