Banks need to adapt to prospect of ultra-low interest rates, says GlobalData

Despite rising inflation as economies around the world reopen following COVID-19 lockdowns and successful vaccine rollouts, the continued fragility of the global economy will likely see interest rates remain at ultra-low levels for the foreseeable future. For banks, this poses significant challenges to their bottom line due to the income they derive from the net interest margin between deposits and loans. Consequently, we are entering an era of banks evolving and adapting to expand into new sectors and offering services that fall outside the traditional banking remit, says GlobalData, a leading data and analytics company.

GlobalData’s report, ‘Adapting to Ultra-Low Interest Rates – Thematic Research’, reveals that for retail banks, these changes have huge significance given that the average bank earns approximately 80% of its revenue from interest income, making them hugely reliant on net interest margin (the spread between the rate they lend at and the rate they pay on deposits made), which is being compressed by the ultra-low-rate environment. As the impact of the COVID-19 crisis is expected to be with us for at least the next half-decade, it is likely that ultra-low interest rates will become a feature of the market that retail banks will have to adapt to.

Mohammed Hasan, Banking Analyst at GlobalData, comments: “What we are seeing from the most innovative banks around the world is intent to become more like technology companies whereby they offer platforms and marketplaces to their retail and business customers, make better use of data and technology to offer superior levels of service and security; all of which enables them to generate new streams of revenue that are not dependent on interest rates, that often also augments existing streams of revenue by encouraging use of traditional banking products and services.”

Banks that have made efforts to reduce the proportion of net interest income that makes up their bottom line, as well as reducing their cost to income ratio are best placed to succeed over the next decade. COVID-19 has enabled many banks to close the gap between them and competitors, who were further ahead in adapting to the macroeconomic climate, as banks of all size have been able to close inefficient branch network and move toward streamlined digital operating models.

The likes of DBS in Singapore, Sberbank in Russia, Bank of America in the US, TD Canada Trust in Canada, and BBVA in Spain and Latin America have established themselves as leaders in adapting to the changing macroeconomic environment by investing in the value chain of the future and reducing waste by decreasing their costs and improving efficiencies. At risk banks include those that have undiversified streams of revenue and high cost-to-income ratios, such as Sparkassen in Germany, Nationwide in the UK, and Permanent TSB in Ireland.

Hasan adds: “As technology companies move further into financial services and banking it remains to be seen how well banks can move in the other direction and capture value from e-commerce, social media, data analysis, and business services.”

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