UK companies are now losing over £7bn a year due to a combination of low bank interest rates and above target inflation while the amount of cash held in business accounts that offer no interest at all has more than doubled since the financial crisis, according to research by UHY Hacker Young.
Interest rates on business deposits are at a record low, at just 0.59% and UHY Hacker Young says this combined with relatively high inflation mean that business savings are rapidly declining in value. It says many businesses say they have to hold large cash balances because they cannot rely on banks to provide overdraft facilities at reasonable rates.
The firm says Bank of England statistics show a record £52.9bn is currently deposited in accounts yielding 0% interest compared to £23.8bn in 2009. It also calculates that of the total of £268bn deposited in banks by UK businesses, £7.313bn is eroded by inflation in a year after interest (RPI).
Mark Giddens, head of private client services at UHY Hacker Young, said: 'Under the Funding for Lending scheme banks are now getting cheap funding from the Bank of England, which means they no longer need to offer generous interest rates to businesses.'
A separate survey from KPMG shows that all five major UK banks recorded a profit in the first half of the year, for the first time since 2010. However, the firm says bank business models are 'unlikely ever to be the same again' despite posting combined profits of £16.5bn, modest lending growth and falling impairments indicating the banking sector is starting to get back on track after the financial crisis.
KPMG's Bank Performance Benchmarking Report says while overall lending was up and customer deposits grew by 6% or £135bn during the period, Return on Equity (ROE) remains in single digits. ROE has roughly halved compared to 2005 levels, from near 20% to under 10% now - and this looks unlikely to reverse in the near-term.
The firm's analysis also shows that 20% of first half statutory profits were wiped out by the continuing need to set money aside against PPI claims (£2.3bn) and interest rate hedging products (£700m). Over the last two and a half years, the total costs of remediation and litigation amongst the top five banks equates to 45% of total profit before tax, KPMG says.
Bill Michael, EMA head of financial services at KPMG, said: 'We have reached an inflection point. Capital requirements are going to put huge pressure on banks to deleverage. The fear is that we will end up with a UK banking sector with very narrow choice, where individuals will not be able to get the products they need.'
