November 30, 2022


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interest, bank |  Miserable returns for bank customers: - Then there will be a path to greed

interest, bank | Miserable returns for bank customers: – Then there will be a path to greed

Although interest rates are on the rise, they are at historically low levels. Even worse for deposit customers is that price inflation is at its highest level since the end of the 1980s, but at that time interest rates were much higher.

In the table below, we have prepared the price increase (inflation), deposit rate and interest return after inflation (real interest rate) in the period 1980-2022. For simplicity, the deposit rate was set according to the interest rate approved by Norges Bank.

It is the deposit rate that banks receive from the Bank of Norway, which over time represents the best deposit rates on the market. For savers of ordinary banks, the situation is even worse than the figures in the table below.

As the graph shows, the real interest rate (the key interest rate minus inflation) will be just above -4 percent this year. 100 NOK at the beginning of 2022 will be a meager 96 NOK at the end of the year, and the price increase eats far more than the interest yield.

Assuming it gets worse, inflation is likely to be higher than the Norges Bank expects, 5.3 percent. In 2021, the best deposit rates were above the policy rate, but many depositors were hacked by about 0.5 percent.

As the table shows, we have to go back to 1981 to find a worse real interest rate. The tax exacerbates the yield, but it has varied over the years and is ignored here.

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Makes good money

Banks are going down. Holberg He believes that banks are making good money by keeping deposit rates low and increasing lending rates. Therefore, they created a graph showing the deposit margin of the banks (in yellow). This margin is the difference between the deposit price (blue line) and Important cash market price for 3 months (Green line).

– As you can see from the graph, the deposit margin has never been higher when you look back at a period of time back in 2014. When banks borrow money in the market, they usually pay the money market interest rate plus the profit margin, says the portfolio manager Ole-Andreas Grendstadbakk’s investment in Holberg to Nettavisen.

– In other words, it is very attractive for banks to finance themselves with cheap deposits rather than loans in the market, he continues.

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Economist Hallgier Quadsheim says banks’ deposit margins are back to their levels a few years ago.

– This means that they “take” the interest rate increase from their customers. In the name of justice, it has to be said that this margin was cut completely in 2019-2021, but there must be a way to be greedy. So yes, people who have deposits in major banks should really pay attention. Kvadsheim says there are many specialized banks that offer much higher interest rates, but still guarantee bank deposits.

forward and backward

In the face of high margins, Austin Andre Schmidt Press Director at Danske Bank said that through the Corona pandemic, Norway has recorded record low interest rates. This applies to both deposits and loans.

– However, for the duration of the Corona virus, deposit rates have not been reduced below zero here at home as we have seen in some other countries, but stopped at the so-called “minimum”. This means that it is natural for us to be a bit more cautious about upward adjustments in the landscape we are in right now, simply to facilitate this in a more normalized interest rate market.

At Danske Bank we have been working for a long time to ensure good competition in the Norwegian market, especially with regard to interest rates. This law is in place of course, and as part of this we also have a higher interest rate on deposits than our competitors over time.

Grendstadbakk says that it is important to note two things about the above graph: the money market interest rate is looking forwardWhat is the market’s view of future interest rates for a particular period. Deposit rate is looking backHistorical.

The deposit interest rate is also taken from Statistics Norway (SSB), which maintains monthly interest rate statistics from a select group of banks where the database is as of July 2022.

In other words, there is a lag in the data compared to the money market interest rate that is updated as of today’s date, says the manager.

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As per policy rate

So Nettavisen considered its public offering to the highest interest rates on the market. go in The best deposit rates are currently 2.25 percent for variable rates, rates that vary by market. It is well above the levels that can be read from SSB, But it is identical to the key interest rate in the Bank of Norway.

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Holberg Offers money market fund As an alternative to low deposit rates. Here, according to the fund manager, investors get an effective interest rate of approx. 3.3 percent. There is an additional return of approx. 1 percentage point compared to most preferred bank deposits.

Money market funds are suitable for investors who want a good alternative to bank savings. Over time, you can expect to get a slightly higher return than you would get on a high interest account. Grendstadbakk says it’s important to note that in some months money market funds can give a negative return.

When it comes to low-risk money market funds, I’m usually a bit lukewarm. There is usually not much that can be gained from investing in such funds compared to the best high-interest banks. But now they are ahead of the horse head and give probably 3-4 percent with low risk. It’s not that bad at all, Quadsheim comments.

A fund such as the Holberg Likviditet invests in bank deposits, certificates and bonds issued by Norwegian banks, housing credit companies, municipalities and companies with high credit quality.

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No interest rates

The investment philosophy underlying all of our fixed income funds is low interest rate risk. We believe it is difficult to generate additional returns in interest rate portfolios based on interest rate bets and therefore spend so little time on it.

We have clearly defined credit risk. We seek incremental returns in our bond funds by assuming credit risk within clearly defined frameworks linked to the credit quality of the companies in which we invest, says Grendstabakk.

As of today, the Holberg Likviditet Fund has been invested in 60 companies. The top 3 investments are loans issued by Danske Bank Boligkreditt, Olav Thon Eiendomsselskap and Eviny (formerly BKK). The fund invests in loans with a term of not more than 1.5 years.

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But anyway, the yield from the interest rate market will be miserable this year. Chief Economist Jan Ludwig Andreessen at Eika Gruppen notes that real interest rates – interest rates minus inflation – have continued to fall in both Norway and the world this year.

Consequently, levels have reached new pre-tax price lows of 3 to 4 percent. According to Andreassen, it is a record that is likely to last for a long time, to satisfy deposit clients. Loan clients benefit from negative real interest rates this year, and will be worse in 2023.

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– Already in the coming year, price growth is expected to slow down to more normal levels, while interest rates at the Bank of Norway will continue to rise slightly. Thus, pre-tax real interest rates would end up at about one percent, close to zero after tax.

These are relatively low interest rates to borrow and invest at. One could assume that real after-tax interest rates close to zero would become the new normal for most powerful investors, Andreessen says. This means that the real borrowing costs will be low, so depositors do not have much to look forward to.

Caution banks

But, according to the chief economist, it does not seem that it will be easier to borrow from the bank next year than this year. Strict credit regulations give banks reason to be cautious. Andreassen believes that most borrowers will be more careful with their borrowing and will reduce the need for loans for cars, boats, homes and homes

So the prices of commercial buildings, homes and homes may drop more than usual this fall. Last year, home prices fell three to four percent in the final months of the year, before turning into strong new year growth this year.

If one assumes that price growth next year will be about three per cent, and wage growth close to four, it is hard to see that nominal price growth will be particularly negative for 2023 if people are optimistic about the years that follow. This applies to both industry and housing.

No permanent retreat

In short, Andreessen says the potential fall in home prices next year will be more volatile, rather than the start of a new permanent decline in nominal (actual) values. He says it will take a lot to ensure that nominal prices for homes in 2025 in cities are not higher than they are today.

– What about the stock exchange?

– She has some of the same logic. There is, of course, the risk of temporary relapses and regular accidents. But as long as companies invest with expected internal return requirements of 5 to 15 percent, it will take a lot for the stock market to end up lower in 2025 than it is today, the chief economist responds.