Bank profitability in the context of declining interest rates: Managing funding cost and allocation of household savings
Bank profitability
Fecha: enero 2025
Marta Alberni, Ángel Berges and María Rodríguez
SEFO, Spanish and International Economic & Financial Outlook, V. 14 N.º1 (January 2025)
More than six months after the ECB started to cut its rates, and almost one year since the market (Euribor) began to discount those cuts, unit margins (the difference between the return on credit and cost of deposits) have started to contract, partially offset by the slight growth in credit volumes observed for much of 2024. Notwithstanding this recent increase in new credit, the new scenario of falling rates, which is expected to continue for the next couple of years, forces the banks to focus on managing customer funds (striking the right balance between off-balance sheet assets and deposits and within the latter source of funding, between overnight deposits and deposits with agreed maturity) while controlling costs to unlock efficiency gains. Within this context, retail deposit funding costs have proven to be a key competitive advantage for certain banks, especially those with significant exposure to savers in smaller municipalities where deposit pass-through has been more contained. Banks that have managed these funding costs effectively are better positioned to preserve profitability as net interest margins continue to decline, particularly by shifting savings into time deposits and offering tailored advice to retain customers and maintain deposit stability.