Save and prosper? Not any longer

Banks are exploiting low interest rates to maximise profits, at the expense of savers.

BANKS AND building societies have taken advantage of falling interest rates and sharply stepped up the amount of money they make from customers. According to a report on the profitability of mortgage lending by a City investment bank, financial institutions are increasing profits by cutting savings rates by more than their mortgages rates.

The report, by the US firm Salomon Smith Barney, shows that between the last quarter of 1998 and the first quarter of 1999 UK banks pushed through increases of up to a quarter in "spreads" - a City term which roughly translates as the difference between the rates banks charge for mortgage loans and the rates they pay on savings.

Spreads are normally the biggest element of the profits made by mortgage banks and building societies: so the larger the spread, the more profit the bank will make on its interest rates. In March, the TSB widened its spread from 2.56 per cent to 3.11 per cent, an increase of 22 per cent in the spread, while Cheltenham & Gloucester boosted its spread by 16 per cent. Abbey National raised its spread by 13 per cent. Between 1998 and 1999, the Northern Rock stepped up its spread from a tiny 0.17 percentage points to 0.58 percentage points.

Even the building societies - which frequently boast of their ability to keep a narrow spread compared to the banks - have joined the trend. Nationwide's spread was up from 1.81 per cent to 1.93 per cent, increasing its margin by 7 per cent, while Bradford & Bingley's rose by 5 per cent.

Banks and building societies have cut both mortgage and savings rates in response to successive cuts in base rates. But last month, most mortgage lenders refused to drop their mortgage rates in spite of a quarter-point cut in base rates by the Bank of England. The decision broke with a two- year trend of tracking interest rates downwards.

The Halifax, Britain's biggest lender, dropped its headline variable rate by just 0.1 of a percentage point. At the time, executives justified the size of the drop by saying they now had to look after savers, who are experiencing some of the poorest pre-tax interest rates for the last 30 years. (Indeed, only the drop in tax rates on interest, which have come down from around 50p to 20p in the pound, has softened the blow for savers.)

However, the Halifax announced on Thursday that it was also lowering savings rates by at least as much as the mortgage rates. On some accounts, interest will fall by 0.1 points. On others the drop is 0.2 points.

Industry observers say that both banks and building societies are taking advantage of a pick-up in the housing market. Last month, mortgage lending hit a new record of pounds 1bn. By widening their spreads, they can improve profits - as well as gain some relief from the relentless squeeze on their earnings caused by competition in the mortgage market.