BANKS are sitting on €50bn in free cash as customers leave more money sitting in their current accounts earning no interest. Deposit returns are so low they have no incentive to move spare funds, says stockbroker Davy in an analysis of lenders’ profitability.
Current account balances at AIB and Bank of Ireland grew by almost €4bn to €38.5bn in the first half of the year. Permanent TSB is to seek to extract even more profits from current accounts by replacing free banking for most new customers with a rewards-based loyalty scheme linked to the volume of transactions on their accounts.
“One feature of the recovering economy is that current account balances increase,” said Davy. “This is due to two factors: the greater level of economic activity and the low-interest-rate environment.
“When rates on offer are so low, they act as a disincentive to customers moving cash from current to deposit accounts, or from demand to term accounts.”
The Central Bank of Ireland says average returns on household deposits fell from 3.29% at the end of 2012 to 1.29% this June. Rates are even lower for new business, with savers offered just 0.31% interest when deposits are rolled over into new accounts on maturity.
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However, the banks’ efforts to improve profit margins have been hampered by a stand-off with the government over the high interest rates charged on variable mortgages. The row has resulted in three mortgage rate reductions at AIB in less than a year.
“Lenders are scheduled to meet the minister for finance to discuss this issue in September,” Davy said.