ECB: Euro Corporations getting a raw deal from their Banks
According to the latest ECB data published on 01 September 2023 Euro businesses are contributing €’billions to bank profits because their banking arrangements are poorly structured.
As the average cost of borrowings has risen from 4.78% to 4.93% the Euro banks are paying only 0.6% on overnight deposits. The banks are increasing their net interest margins at the expense of corporations.
This increase in net interest margins is being funded by businesses because they have legacy banking structures and cannot capitalise on the rise in market rates. The banking system is too rigid for companies that are innovating elsewhere in their businesses but are stuck with banking arrangements housed on decades old core banking systems.
CFO’s and Treasurers need to assess these surging banking costs and determine the business case for change. Banking relationships have never been more important but banks cannot be allowed to exploit companies and generate vast profits just because the interest rate environment has changed.
Most businesses have banking arrangements that date back over a long period of time and are no longer fit for purpose. At near negative and near zero rates there was no business case for change. However they are losing billions by not taking any action and making changes.
There is now a compelling opportunity for businesses to improve their revenues by optimising their banking structure without having to change banking relationships. CFO’s and Treasurers must push their current banking partners to improve the commerciality of their offerings or if not look at real alternatives.
Some banks are more accommodating than others and there is a drift away from ‘legacy banks’ for day to day operations to banks with innovative capabilities. Fintech offerings now offer a serious alternative to the offerings of the traditional banks.
ECB July 2023 Statistics Summary
Chart 1: Bank interest rates on new loans to, and deposits from, euro area corporations
(percentages per annum)
“Composite cost-of-borrowing indicator for new loans to corporations increased by 15 basis points to 4.93% In July 2023, driven by interest rate effect”;
“Composite interest rate for new deposits with agreed maturity from corporations increased by 6 basis points to 3.32%, driven by the interest rate effect”;
“interest rate for overnight deposits from corporations increased by 5 points to 0.6%, driven by interest rate effect”.
With many companies achieving no return on current account funds, the opportunity cost of bank funds is growing. The lesson for CFO’s and Treasurers is to re-evaluate the real cost of banking and establish the business case for making changes and stem the losses.
Bankhawk’s core service for companies, with three essential elements, audit, benchmark and optimise, provides companies with the know-how to update their legacy banking arrangements and generate large cost savings and maintain their existing banking relationships.
Bankhawk will be sharing its thoughts on recent developments with Treasurers at the Eurofinance 2023 conference in Barcelona this week (Sep 27-29).
Source: ECB/statistical release/ bank interest rates/ September 2023