In my column on this platform a week or so ago, I wrote about the battle for UK bank deposits and noted that while the biggest banks still dominate, the largest digital challengers are breathing down the necks of traditional mid-sized rivals. Well, that battle could heat up in coming months and into 2025 and could see deposit and savings rates rise even as the Bank of England’s monetary-easing cycle potentially starts to approach a stride.
Higher deposit rates are clearly great for savers and depositors; equally clearly not so great for banks’ net interest margins and profitability.
At its July 31 meeting, the Bank of England cut rates by 0.25 percentage points to 5% on a slim 5-4 majority. That was the first cut since rates began their precipitous rise at the start of the pandemic from the now-scarcely-believable 0.10% (which held between March 2020 and December 2021) to 5.25% last August, the culmination of 14 consecutive rises. There are market expectations that the BoE’s next Monetary Policy Committee meeting on September 19 could see another rate cut.
But even if there is, there could be a perverse response from some UK banks, i.e., they could raise savings rates, going against the fundamental principles of banking.
Perverse response
Why? Because they’re soon going to have to start repaying the BoE’s pandemic-era Term Funding Scheme with additional incentives for Small and Medium-Sized Enterprises (TFSME). By the end of 2021, banks had taken a weighty £193 billion (US$254.58 billion) from TFSME, a four-year collateralized loan facility intended to keep credit flowing to SMEs through the pandemic.
Even after chunky average quarterly repayments of £8 billion between Q4 2022 and Q1 2024, outstandings at August 21st 2024 were still almost £130 billion. A total of 71 UK banks participated in the scheme. Four repaid their drawdowns early, leaving 67 with amounts to repay. At the end of Q1, the six largest UK banks had 70% of outstandings: Lloyds, £30 billion; Barclays, £21.9 billion; Santander UK, £16.8 billion; NatWest, £12 billion; HSBC, £10.3 billion; and Nationwide, £9.2 billion.
That leaves some small and mid-sized banks with reasonably large amounts to pay relative to their deposit stocks, ease of access to wholesale finance, or balance-sheet optimization options such as asset disposals via securitization or portfolio sales. So, as competition for liquidity hots up, banks could be forced to offer higher savings and deposit rates if other options fail to materialize in sufficient size or are not economically viable. And all just as the BoE has started to cut policy rates.
Metro Bank (£3.05 billion in TFSME outstandings at the end of Q1 2024) just closed the sale of a £2.5 billion portfolio of prime residential mortgages to NatWest and will use the proceeds to repay TFSME, “eliminating”, it noted, “any industry-wide deposit-funding headwinds going forward”. In its full-year results trading update earlier this year, Metro noted that its wholesale funding expenses increased as a function of interest rates, where its largest expense is the TFSME. Due to higher rates, Metro’s TFSME expenses rose threefold to £161.3 million in 2023 from £55.5 million in 2022. The bank said early repayments of maturities scheduled for 2024 and the start of 2025 were partially funded by repurchase agreements.
One Savings Bank Group noted in its interim report for H1 2024 that what it called its “competitively-priced offering” (that saw its retail deposit book grow by 10%) allowed it to continue repaying TFSME drawings. The group also completed a £509 million securitization of buy-to-let mortgages in February (PMF 2024-1) and a £330 million securitization of owner-occupied mortgages in May (CMF 2024-1). “We will continue to access the wholesale markets when conditions are favourable to benefit from diversification of funding and to support a smooth transition as we repay TFSME drawings,” OSB noted.
In the first half of this year, the group repaid £1.7 billion of TFSME funding with the remainder due by October 2025. At June 30th 2024, the group’s TFSME drawings stood at £1.6 billion, from £3.3 billion at the end of 2023.
Meanwhile, in its 2023/2024 annual report, Atom Bank acknowledged: “Competition for retail deposits has intensified, raising the cost of new funding. Surplus deposit balances have been carefully managed down as a result. There is a risk of increasing competition for funding as the BoE’s TFSME approaches maturity in late 2024 and 2025.” Atom said its asset encumbrance of £1.393 billion (FY23: £1.21 billion) is predominantly through its participation in TFSME and its Elvet securitization programme.
Extended maturities
Not all TFSME repayments are due in 2025. Lloyds Bank said, for example, that while the contractual maturity of £21 billion of its TFSME total falls in 2025, £9 billion comes due 2027. Starling Bank said its TFSME drawings (£2.2 billion at the end of March 2024) have residual maturities of between less than a year and three years.
That’s because while the original term of the TFSME was four years, lenders could extend the maturities of transactions from four to six years in phase one and to 10 years in a second phase to align them with the maturities of loans granted through the British Business Bank’s Bounce Back Loan Scheme (BBLS) that came after it. First-phase extensions were completed in 2022. Under the terms of phase two, announced in May 2024, the TFSME funding that could be extended to 10 years was capped at the amount of BBLS loans on participants’ balance sheets at June 30th 2024.
I can’t find data showing the exact maturity schedule by amount or by bank after maturity extensions but repayments are big enough that they’re weighing on the BoE. In its most recent Financial Stability Report (FSR) in June, the central bank laid out several options for banks to be able to repay maturing TFSME funding: reducing their stock of liquid assets or replacing it with other forms of funding by competing for deposits, more wholesale issuance, or using BoE facilities (like the short-term repo and indexed long-term repo facilities).
Of course, as well as rate cuts, the TFSME repayment schedule is hitting as the BoE is unwinding holdings in its asset purchase facility. “It is important that banks factor these system-wide trends into their liquidity management and forward planning over the coming years,” the BoE cautioned in its June FSR. It said the combination of its balance-sheet unwind and the end of the TFSME scheme will affect sources of bank funding, and could affect their cost.
