Banking profits soar, but there are only modest drops in commissions charged. “It’s an excellent example of a lack of social conscience”

Bank profits will soar again in 2023 as interest rates rise and will have reached their highest value since 1990. Even so, commissions charged to customers are only expected to register a marginal decrease

The increase in interest rates initiated by the European Central Bank (ECB) from July 2022 has allowed most banks in the euro zone to substantially increase their profits and banks operating in Portugal are no exception to the rule. If in 2022 national banking had already recorded the highest profits in 15 years, last year profits rose even more and are expected to exceed 4,300 million euros, considering only the five largest groups operating in Portugal. It will be the highest value, at least, since 1990, the first year recorded by Banco de Portugal in the banking sector’s long series.

These results are largely based on the growth of the financial margin, the difference between what banks charge when they lend money to customers, or when they deposit their ‘savings’ in their respective central banks or the ECB, and what they pay when they have to finance themselves.

The reality, however, was not always this. Following the international financial crisis in 2008 and the sovereign debt crisis in the euro zone in 2010 and 2011, the ECB began to lower interest rates and even put them at negative values. In practice, commercial banks had to pay the ECB to store their financial assets there. At the same time, this was a period in which banks were unable to grant credit, given the existing economic difficulties and, as such, they were unable to obtain the financial margin that would allow them to guarantee profitability.

That’s why banks, as an alternative to making profits, started to increase the commissions they charge their customers. This was, at least, the justification given by the Portuguese Banking Association (APB). But as commissions increased, political pressure and pressure from consumer protection associations also increased for banks to change their stance, a pressure that even led to the adoption of legislative measures that, today, prevent banks from charging a set of commissions.

And now that banks are already achieving large profits through the growth of financial margin, it was expected that commissions would begin to decrease, as was highlighted several times, even by the governor of Banco de Portugal himself, Mário Centeno.

Banks around the world and in Portugal had to largely review their business plans due to the very long period of low interest rates (…) I hope this [descida nas comissões] reflect (…) in the coming times. We will closely monitor this reality”. Mário Centeno, governor of the Bank of Portugal, on January 10, 2023, at the parliamentary committee on Budget and Finance

But that has not been the reality. Between 2022 and 2023, the years in which banking profits reached unprecedented values, the amount allocated by banks in commissions remained practically unchanged, registering only a slight decrease in 2023.

2023 results of the largest banks

“The financial results, for the year 2023, presented by the main banking institutions operating in our country, demonstrate a strong increase in the financial margin, as a result of the very significant increase in interest rates over the last year which, due to the predominance of credit contracts variable rate credit, had an immediate impact on the banks’ results”, notes Nuno Rico, specialist in financial matters at Deco Proteste.

And if these profits result from changes in interest rates, the same cannot be said about the value of commissions charged.

Nuno Rico recalls that the reduced financial margins in times of low interest rates were the argument presented by banks to justify the constant increases in commissions, but now that rates are high again “it is incomprehensible that the amounts charged to customers show a reduction residual, having even increased in the case of Novo Banco, despite the various prohibitions and limitations on the charging of commissions introduced by legislation during the last year”.

In practice, continues the Deco Proteste specialist, “what appears is that there were no reductions in bank commissions, contrary to what would be expected given the arguments previously used by banks to justify the increase. The reductions in the total charged in the meantime resulted only from the prohibitions and limitations imposed by the new legislation”. An attitude that Nuno Rico says “is an excellent example of some lack of social conscience, so often proclaimed” by the bank. The expert reinforces, in fact, that “the constant complaints from this sector about the rules that prevent some commissions” demonstrate “that, given the absence of self-regulation, it is only in this way that it has been possible to control some of the charges borne by bank customers”.