Lower interest rates force banks to diet

ECB cuts ease credit and sink deposit rates

Personal finance For the third time, the ECB lowers reference rates, helping house payments fall further in November

The interest rate cut by the European Central Bank (ECB) will dictate a reduction in mortgage payments for all contracts that renew in November. The size of the relief will depend on the capital outstanding and the Euribor index (3, 6 or 12 months), and savings can exceed €210 per month for Portuguese people who have loans of €250,000 indexed to the Euribor for 12 months. , according to Deco’s accounts sent to Expresso. It means that, over the next year, these families will pay €2,500 less to the bank.

The simulations cover several cases. For those with contracts indexed to 3-month Euribor, the reduction can vary between €28.02 and €70.05 for loans between €100,000 and €250,000. For those who indexed the contract to 6-month Euribor, the majority, the savings range between €46.89 and €117.23 per month, in the same cases.

Until the end of last year, there were around 1.3 million real estate credit contracts in Portugal, the vast majority of which had variable rates, with the prevalence of the 6-month Euribor.

"Families, especially those most indebted, with credit with variable rates already have and will feel some relief in the value of their benefits in the next reviews, but prudence is still required in managing their credits", says Natália Nunes, coordinator from Deco's financial protection department.

With the drop in interest rates, Banco do Portugal already admits reviewing the stress rate on real estate credit. Since October last year, banks have been forced to carry out simulations by adding 1.5% to the interest rate contracted on real estate loans, to check whether customers will be able to fulfill the credit if rates rise. But if benchmark interest rates continue on this downward path, this requirement could change. In the economic bulletin released this month, Mário Centeno warned that "if there is an accumulation of risk for the bank or borrowers that is contrary to the letter or objective of the macroprudential measure, Banco de Portugal has instruments to act”.

Natália Nunes, from Deco, remembers that, in parallel to credit, the BC's latest decisions also affect deposits. "We know that the drop in interest rates has an impact not only on reducing the value of the variable rate benefit, but also on reducing the remuneration of term deposits”, he recalls. "We found that, like what happened with interest rates on real estate credit, the market is also anticipating the ECB’s rate cuts for deposit remunerations”, he adds.

Furthermore, the Deco manager says that "families know that despite the drops in interest rates, their installments are still well above the amounts they paid at the beginning of 2022, that prices, especially for food products, have risen drastically and that they are continue to rise, which is why control and a lot of prudence continue to be required.”

The ECB's third cut

Nothing is guaranteed, but if inflation continues its downward trend, families and companies will receive the relief that the market has been anticipating.

And with that, a savings in income that was absorbed in recent years is used to pay installments and respond to inflation on all fronts. Those who have a real estate loan are seeing their installments fall and this creates, according to economists António Nogueira Leite and João Duque, a positive effect not only on families but also on companies, which tend to have better financing conditions. But this scenario has a B side.

"It is expected that deposit rates will continue to fall throughout this year and next, but banks still seem to want to compete for deposits, which is not unrelated to the need to have capital cushions and for savings certificates to reinforce competition, given that the maximum amount of investment was doubled”, says Filipe Garcia, economist at the IMF, to Expresso, anticipating, however, that this rate should not return to 0%.

On one-year term deposits, average rates rose from 3.8% in December 2023 to 2.57% last August. And in a round made by Expresso, most banks offer a 12-month gross rate of less than 2.35%. A reality that could once again make Savings Certificates more attractive.

A new relief

"In a context of slowdown in the main economies of central Europe, especially Germany, it is good for non-financial companies, as it will translate into better financing conditions, the same goes for families who owe banks”, observes António Nogueira Leite.

Default is an important factor in the interest equation and, therefore, "an additional positive effect (rate cut) is to provide relief to the cash flow of companies and individuals, leading to lower chances of defaulting on credit contracts”, he says. Paulo Pinho, professor at Nova SBE, although he also says that "given the current low level of default there will not be a very significant impact here”.

This relief, combined with government measures for young people up to 35 years old, could attract more Portuguese people to take out bank credit. Filipe Garcia expects "a slight increase in operations” in the coming months, especially because banks are strongly adhering to the bank guarantee of 100% of financing (increasing the previous limit of 90%), as revealed last week by Vitor Bento, president of Portuguese Banking Association.

João Duque, economist and president of ISEG, tells Expresso that "with regard to real activity, a drop in interest rates is expected to have a positive impact on consumption and investment as it makes the cost of capital lower ”, and this "makes it possible to increase the profitability of investments, makes credit for consumption and investment cheaper and this ends up allowing investments to be made when previously, in an environment of high interest rates, they were unfeasible. Savings become less encouraged. If this leads us to increase the use of financing by non-residents, then, later on, the remuneration of these savings flows outside the national space and we are the ones who lose out”, concludes Duque.

Natália Nunes, from Deco, is cautious. "For families who have variable rate mortgages, times are marked by some financial relief until the end of 2024”, but "it is important that families do not start to ease the management of their accounts”, he notes. After all, the economist continues, "the situation is better”, but "we need to be very responsible in the way we manage our money”. "This is the time to look at our savings, and analyze investment alternatives that can offer greater returns given the drop in interest rates on traditional banking products”, says Natália Nunes.

The impact of the BC's interest rate cut doesn't stop there. Banks will undergo forced downsizing resulting from the cut in reference rates. Banks' fat revenues are slowing. "The more than likely drop in interest rates will, from the outset, have a negative impact on banking results. As the majority of credit is granted at variable rates and with a significant portion of financing via practically uninteresting demand deposits, the margin between these two products will shrink and this will be the effect with the most important impact”, warns Paulo Pinho.

The Nova SBE associate professor also says that in addition to the reduction in banks' results, "it will be necessary to take into account the positive effect that this decline will have on the value of the public debt portfolio (which will have little impact on results, given that it is mostly accounted for as held until maturity) and, to a lesser extent, an increase in the value of some fixed rate liabilities (debentures issued)”.

There is no beauty without anything else. "The combined effect of all these factors points to a reduction in the results and market value of banks”, in an "inverse path to that followed during the period of high interest rates”, concludes Paulo Pinho.

In turn, António Nogueira Leite, professor at Nova SBE, director of HipoGes and former director of CGD, tells Expresso that for companies these ECB cuts "will have impacts from the coming months onwards, depending on their credit contracts”, next to the banks.

"The reduction in installments on home loans, as well as the reductions in IRS, will allow families to increase their disposable income, which is a basic condition for increasing savings”, highlights João Duque.

Savings or consumption? But João Duque warns that "increased income does not mean immediate increases in savings”. "This depends on the marginal propensity to consume or save”, says João Duque, concluding that "unfortunately our culture has not encouraged saving. I fear that most of this disposable income will end up in consumption and, unfortunately, in the consumption of imported goods”, says the economist.

António Nogueira Leite, in turn, believes in the increase in family savings and in their caution in a context of geopolitical uncertainty. But the situation is already one of falling remunerations on term deposits, especially 12-month deposits. "Banks are already reducing the attractiveness of deposits as a way of investing savings, which can make alternatives more attractive, not only in the bank's portfolio of savings products but also in the offer of other non-bank entities”, points out Nogueira Leite.

In this context, Natália Nunes, from Deco, suggests behaviors such as "optimizing the family budget”, identifying areas where it is possible to eliminate or reduce expenses, and having "an emergency fund”, a savings that must represent at least the corresponding value of six months of your expenses. And finally, invest savings in different asset classes to reduce risk.

"IT’S IMPORTANT THAT FAMILIES DON’T START TO RELIEVE THE MANAGEMENT OF THEIR ACCOUNTS”, SAYS NATÁLIA NUNES, FROM DECO

Rates ‘eat’ more than half of bond interest

Corporate debt issuance may increase, but taxes and commissions take a large part of the remuneration

For the second time this year, Sporting is also looking to score goals off the pitch. The Leonine SAD has a €30 million debt issue underway, with maturity ending in 2028. Investors, who have until October 31 to subscribe to the bonds, can receive a gross rate of 5.25%, but between commissions and taxes They may not receive even half.

Those who opt for the minimum investment allowed (R$2,500) will receive, on average, a net rate of 2.07%, if they invest through the bank's app or website (at the counter, the remuneration is lower). The State collects €147 (the value of taxes on gross interest over the four years of the loan) and rates fluctuate from bank to bank, and there are cases where the costs for the investor exceed €700.

In this case, the interest that the investor receives is practically in line with the expected inflation for the next two years, according to Banco do Portugal projections. It means that the real remuneration of those who choose to invest this amount is practically zero during this period.

In this "green and white” operation, the effective remuneration becomes more attractive as the investment gains volume. For example, when investing €5,000 or €10,000, the interest receivable rises to an average of 3.04% and 3.5%, respectively, according to simulations carried out by Expresso on the CMVM (Securities Market Commission) website. Furniture).

In recent months, several companies listed on the national stock exchange have been knocking on the market to issue debt to retail investors. As a rule, the higher the gross interest, the greater the perception of associated risk. In June, it was SIC that went looking for investors, paying 5.95% gross, and since September other companies have followed the same path, with lower rates. The construction company Mota-Engil placed €80 million in debt, for sustainability purposes, with almost 5 thousand retail investors, having paid gross interest of 5%.

In all situations, commissions and taxes ‘eat’ more than half of the contracted return, especially on smaller investments. In the case of SIC, the rates could be 90% of the interest. At this moment, the Sporting SAD 2024-2028 debt issue is the only one available for subscription by families in Portugal.

By comparison, the average rate on bank deposits is slightly below 2.6% (August figures) and, unlike these debt issues, deposits have controlled risks as there is a guarantee fund of up to €100,000 per depositor .

"It is essential that [bond] investors are aware of the associated risks, particularly credit risk and the absence of deposit-like guarantees. Diversification and a careful analysis of the conditions of the issuing company are fundamental to managing these risks. Conservative investors should consider whether the potential return justifies the additional risk”, explains Paulo Monteiro Rosa, senior economist at Banco Carregosa, to Expresso. BPI says, in a written response, that this "explains the greater profitability typical of corporate debt issues, as greater risk is usually associated with greater returns”.

Can ECB lend a hand? With the new interest rate cut by the European Central Bank (ECB), the cost of financing for companies decreases, which could cause this type of operation to increase in the coming months, according to experts at Banco BPI. "But the cost of investment is not the only factor that matters when deciding to invest”, they add.

A reduction in ECB rates is already leading to a drop in interest rates on deposits in Portugal, which, in theory, could make this type of operation more attractive. But, in practice, this may not be the case, because companies' debt issues "tend to follow the economic cycle”, says Paulo Monteiro Rosa. "For investors, new bond issues may become less attractive due to lower returns, which may lead them to look for riskier alternatives or other more profitable assets,” he adds.

The investor's profile will determine where the money will go. "For a more conservative profile, sovereign bonds [country debt] may be a safer choice, while less risk-averse investors, seeking higher returns, may consider corporate bonds, especially from companies with solid financial balance sheets,” concludes the Carregosa economist.