Greetings from the latest update of our ‘All About Finances’ newsletter. This time around, our focus is on savings.
Given the persistent popularity of our articles relating to consumer finances, it’s clear that there’s a strong need for guidance on effective money management. However, the reality of banking practices make us question whether the guidance is being heeded.
When even banks are flagging their increased profits resulting from individuals missing out on opportunities for higher returns on savings, it’s high time we reassessed the situation.
By the close of the previous year, both AIB and Bank of Ireland were holding roughly €60 billion of public money as deposits at the Central Bank. Given the existing deposit rate of 4% from the European Central Bank, they could expect an approximate annual interest of €2.4 billion – and what do we get in return? An average of €78 million. It’s a healthy profit banked just shy of €2.3 billion, without them lifting a finger.
However, there’s more to it. Central Bank statistics from February reveal that Irish households have deposited a total of €154.5 billion with the banks. The banks utilise a proportion of our savings as loans to other clients, in addition to the money housed in the Central Bank. Central Bank brought out fresh data in March indicating that the recent average mortgage interest rate stood at 4.31%, whilst the average overnight deposit rate was a mere 0.13%. This arrangement is even more lucrative for the banks than just holding the money at the Central Bank.
Due to a general customer apathy, Irish banks are levying a higher than average mortgage lending charge across the euro zone (4.31% against 3.84%), whilst offering us less on our savings (0.13% in Ireland versus a 0.39% average across the euro zone). The return? Practically insignificant.
When examining what the individual Irish banks presently propose to clients for demand deposits, AIB emerges as the most generous of the three left, offering an interest rate of a mere 0.25%. The Bank of Ireland’s proposed rate is a slightly more contemptuous 0.1%, but even that seems a luxury compared to the 0.01% that you would receive from Permanent TSB, now referred to as PTSB.
If you consider the value of actual cash, having roughly €10,000 savings in a standard on-demand deposit account with any of these banking institutions will yield you an annual interest of €25 with AIB, €10 with Bank of Ireland, and a mere €1 with PTSB. This is before the Government applies a third of the amount as deposit interest retention tax (DIRT).
Even the banks themselves are aware of this unusual situation. Last year, Myles O’Grady, CEO of Bank of Ireland, noted that customers have been slow to shift their savings from non-interest-bearing accounts to ones that provide interest.
At AIB, CFO Donal Galvin expressed that customer conversion to increased rate savings has been more sluggish than expected. Despite subtle improvements recently, the majority of household deposits, nearly 95%, continue to be in instant access or on-demand deposits towards the end of the previous year.
Recent statistics from March suggest a slight decrease of this figure to just below 90%. This is the third consecutive month of decline, described by economist Dermot O’Leary of Goodbody as a gradual shift in household deposits to term accounts. Nonetheless, considering the current 0.13% interest rate is a seven-year high, it eloquently displays the fact that a significant portion of Irish customers is being taken advantage of by banks.
It has been noted that Irish savers can get better returns by taking their money overseas. Given the average overnight savings rate in the eurozone is three times that of Ireland, it’s clear that other European banks offer much more competitive interest rates than Irish ones, while extending the same protection for up to €100,000.
To illustrate, even if you restrict yourself to banks with credit rating higher than current Irish banks, you can obtain a return of 1.76% on instant savings with TFBank in Sweden, guaranteeing protection on savings up to €90,000.
Banks with credit scores on par with Irish banks, such as Norwegian Bank Morrow, could provide you an interest rate of 3.03%, safeguarding savings up to €100,000. However, Irish depositors show some hesitancy in transferring their savings to foreign banks, especially those largely operating online.
Examining Irish banks individually, starting with AIB, you could triple on your returns to 0.75% if you choose to offer a seven-day notification before any planned withdrawal. Locking your savings for a shorter duration can offer higher returns. You can yield an annualised rate of 1.75% with a six month term deposit, which escalates to 2.5% for a year, or 3% annually for a tenure of two years. The constraint is that AIB’s fixed term offer is only available to depositors with a minimum of €15,000 to invest.
Switching to the Bank of Ireland, providing you maintain a minimum of €5,000 in your savings account, you could raise your demand deposit rate from 0.1% to 1% by pledging to give a one month notice. This bank’s fixed term accounts also offer greater flexibility than AIB, by permitting you to withdraw up to a quarter of your money within the lockdown period. Implementing this strategy enables you to acquire an annualised return of 1.5% on a six month fixed term, 2% for one-year, and slightly below that for a two-year locked-in account.
PTSB also proposes 1% on its notice account that requires a 40-day withdrawal notice. Persons who open a regular saver account rather than deposit a lump sum enjoy a return of 2.5% on balances up to €50,000.
The same €5,000 entry barrier applies to a broad array of fixed-term options, akin to the offerings from the Bank of Ireland. Interest rates fluctuate, ranging from 1.75% per year for six-month terms without withdrawals to a high of 3% per year with a three-year hold term.
Intermediate rates include 2% annual interest for a one-year deposit, 2.5% for an 18-month term and back down to 2% yearly for a five-year term. As highlighted in previous product discussions, fixed term deposit rates from Irish banks tend to be less rewarding compared to offerings throughout the Eurozone. The average interest rate is 2.51% as opposed to 3.16% across the broader region.
Despite the European Central Bank’s 4% rate on deposits, banks continue to profit from these products; though, you also gain a share of the benefits. The returns generally surpass those from instant access accounts.
Savings by nature are funds we don’t foresee needing immediately. Therefore, most individuals should be able to move substantial portions of their savings to either a notice account or a fixed term deposit or even distribute it across both.
Importantly, your savings are not obliged to remain at the institution where you maintain your current account.
For consumers, the bottom line is a lack of motivation for banks to enhance the rates on instant access accounts or term deposits, as long as clients remain with them.