Banking extra-profits

One-way Ius variandi: with position rents for banks and no protection for customers

Credit institutions disregard the Bank of Italy's call to review rates and charges in favour of current account holders. And meanwhile profits run

3 July 2024

4' min read

Confirmation that the run of banking profits has not yet come to a halt is expected from the half-yearly reports that are about to close. Record results for 2023 provide the backdrop: net system profits of EUR 32.7 billion (+132% on 2021), driven by financial margins that have jumped from EUR 38.4 billion to EUR 62.1 billion in two years, and loan adjustments that have collapsed to EUR 6.3 billion from EUR 38.1 billion in 2013.

Raising the bar and expectations on 2024 profits, in addition to the statements of some bankers, were the March quarterly reports of the largest groups (around 80% of the sector), which closed with total profits of 8 billion and a money margin of 13. Then, while waiting for the ECB cuts that started in June with a timid quarter point, the data for the first five months of 2024 (published by the Bank of Italy and ABI) confirmed the high average customer rate differential (also a record): 355 basis points, against an average of 332 last year. From customer spreads and return on assets at 4.16% (3.78% in 2023), there would emerge an annual increase of 2.3 billion lire in the financial margin on deposits from resident households and businesses: 2,042 billion lire as at 31 May - on deposits, repos and bonds - remunerated on average at 1.26%, against a loan rate (1,276 billion lire) perched at the maximum of 4.81%.

Penalised runners

In April, current account balances exceeded 1,300 billion lire and accounted for 64% of deposits. These are sight deposits which, according to the distribution shown in the latest balance sheet, the largest banks allocate 10% to cover customer loans on demand and 62% to maturities, investing the remaining 28% in government bonds and other loans. Theoretically, the current account has no investment function for account holders. But in reality, as seen, it does for banks.

However, the remuneration on account balances stands at 0.57% (compared to 2.49% for deposits outstanding at maturity). In detail, the rate is 0.38% on household accounts (weak contractors) and 1.02% for companies. Before the long period of zero or negative rates, in the years 2000 to 2008, average rates on current accounts were 1.02% for households (with months at 1.77%) and 1.69% for businesses (up to 3.10%). In those years, the remuneration on current accounts was 50% (households) and 83% (companies) of the official ECB rate on overnight deposits.

After the negative rates, from July 2022 to last April the same ratio was reduced to one fifth, stopping at 8% and 18% of the ECB rate respectively, proving the banks' persistent delay in repricing outstanding deposits. And while it is true that Italian banks have never applied negative rates on customer accounts, it should also be considered that they have benefited from ECB subsidised loans (LTRO) since 2014, with an annual net compensatory gain estimated by the Bank of Italy at 3.3 billion, equivalent to 0.22% of current account balances.

Rates and expenses to be reviewed

In this scenario, the threat of the tax on extra profits having been filed away without cost (the largest parent companies set aside EUR 4.6 billion as a reserve instead of paying EUR 1.8 billion to the Treasury), the banks have also mostly disregarded the Bank of Italy's call on 15 February 2023 to revise - in a favourable sense for all customers involved and not only ad personam - the remuneration of current account deposits and the related charges, respectively zeroed and increased over the long period of negative rates.

A reminder misinterpreted by the banks (previously not self-obliged to restore) as an invitation to "assess the advisability of reviewing the conditions" and not as a "need to restore the actual balance of the (contractual) commitments originally undertaken by the intermediary and the customer". The Bank of Italy has indicated that it has initiated contacts with 13 operators to investigate the initiatives taken or planned. We will see with what outcome. But, in any case, it is not enough.

Surplus protection

At the Bank of Italy conference last December ("A 30 anni dal Testo unico bancario"), it was recalled how the customer (especially if a weak non-professional contracting party) deserves to receive a substantial surplus of protection in order to restore a level playing field between contracting parties. Mention was also made of the debate that originated in the February 2023 Communication, concerning the configurability of an obligation for banks to modify contractual terms and conditions in melius, following changes in market scenarios of an opposite sign to those that had justified the variation in peius. As argued by authoritative doctrine, if this were not the case, the unilateral amendments pursuant to Article 118 Tub would deviate from their function (preservation of the original convenience of the deal) and would create position annuities that would enrich the banks beyond what was contractually provided for.

In order to ensure the effective protection of customers, therefore, it would seem necessary: a) to oblige the bank to formally amend for the better when the justified reason given in the previous amendment for the worse ceases to exist, also providing for the ineffectiveness of the latter from the moment of the contrary; b) to provide for the publication, in the transparency area of the bank's website, of all unilateral amendments communicated to customers pursuant to Article 118 TUB, as information on the correctness of the intermediary's post-contractual conduct.