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What Tipping Points might there be in the UK Savings Market? Part II: Competition

Thursday 5 December 2019 Data Insight & Analytics

Paul Kenny's picture
By Paul Kenny

In this second instalment I consider what else, if not tech, might have a significant effect on the UK savings sector.


Competition and consolidation

More than 40 banks have entered the UK savings market in the last ten years. They’ve been attracted by the relatively low cost of funds, and the purposes to which they’ve put the deposits they’ve generated – asset finance and commercial loans attract a wider margin than retail mortgages. The most high-profile of all has been Goldman Sachs. Their CFO, Stephen Scherr, said in April, ‘For every $10bn of wholesale funding replaced with deposits, we estimate savings of roughly $100m in interest expense annually.’ If you could save 100bps from your cost of funds, why wouldn’t you launch a retail savings brand?


Yet the market has already begun to consolidate: FirstRand and Aldermore; CYBG and Virgin Money; OneSavings Bank and Charter Court. I suspect this will only continue – fewer competitors, but not necessarily less competition. 


Interest rates: how low might they go?

So many of the signs seem to signal down. The last three Federal Reserve decisions on US rates have been to cut them. Some say that the primary reason the Bank of England increased UK Base last year was so that it could cut it after Brexit without going too near zero. I have no doubt whatsoever that if the UK had left the EU on 31 October, then Base would have fallen the following week. In August, Denmark’s Jyske Bank launched a negative-rate mortgage, fixed it for ten years, and told savers they would be charged for holding large deposits. That couldn’t possibly happen here – could it?

Some observers argue that an unintended consequence of ring-fencing retail banks from their investment arms has been increased competition in the mortgages market. In September, Ian Stuart, Chief Executive of HSBC, said he wanted to increase its mortgage book by £35bn. At an average case value of, say, £200,000, that’s 175,000 mortgages. 

Then again, another unintended consequence is unwinding and might inject an upward pressure on pricing. It’s generally accepted that the Funding for Lending Scheme, and the Term Funding Scheme which followed it, caused savings rates to fall. Settlement of these borrowings is due to be completed by 2021, but our best estimate from the BoE Q3 data is that repayments are £22bn ahead of schedule. Might the squeeze on margins end sooner than expected?


The next and final instalment of this blog series is now available here, in which I delve into the effect that climate change and the unpredictability of global politics is having on the savings sector.

How have competitors affected the UK Savings Market?

What Tipping Points might there be in the UK Savings Market? Part II: Competition