Leaving money in the bank pays less and less. Savings certificates are (even) more attractive

 Leaving money in the bank pays less and less.  Savings certificates are (even) more attractive

Portuguese banks offer on average 11 times lower interest rates on deposits than European banks. Savings certificates are more attractive products, but the Portuguese still have a lot of money in deposits

The European Central Bank (ECB) first signaled last December that the first rate hike in the eurozone could take place as early as 2022. from the central bank.

Inflation in the eurozone was 5% at the time and people still believed that the price increase could be a temporary movement. Today inflation is at 10% and the key ECB interest rate has gone from zero to 2%.

Despite the uncertainty at the time, the markets really believed that interest rates would rise and month after month, the interest rates charged by banks on the credit they provided continued to rise.

In January, the average interest rate on new home loans to private individuals was 1.34% in the euro area and 0.81% in Portugal. In September, the exchange rate was 2.38% in the euro area and 2.23% in Portugal. And with this increase, the monthly repayments of those who were in debt to the bank increased.

The only good news that could come out of this general rate hike for the foreseeable future was that the interest rates at which savings were reimbursed would also rise. An increase that could offset some of the real loss faced by the same savings in the face of rampant inflation.

But what happened in 2022 shows that, if that was the expectation, the reality with bank deposits has been very different.

In January 2022, the interest rate on deposits up to one year in the euro area was 0.19%. In Portugal, this same percentage was only 0.04%, almost five times less. And if in the set of countries using the euro that rate rose to 0.56% in September, then the rate in Portugal only rose to 0.05%. The difference is now more than 11 times.

Why interest rates on credit are rising and not on deposits

The different evolution of interest rates is explained by various factors, ranging from the rules governing these interest rates to the situation on the banking market in Portugal.

For António Ribeiro, financial affairs specialist at DECO PROTESTE, and Vinay Pranjivan, a specialist in consumer protection and financial services, the answer is simple: while interest on loans is a revenue for banks, interest on deposits represents a cost.

There are other factors to take into account. “Most loans are indexed to Euribor rates, especially mortgages, so the adjustment is immediate on the update dates; deposits, on the other hand, have no direct link,” explains António Ribeiro. Deposits are indexed to Euribor, but the specialist points out that these are rare.

Vinay Pranjivan also follows the same line, arguing that the increase in deposit rates is a commercial decision.

The speed at which this adjustment is made is a commercial decision and in the absence of a highly competitive market – the five largest commercial banks have nearly 80% market share – the adjustment can be slow without major changes in deposits”says Vinay Pranjivan.

Savings certificates are a safe option

And without the expectation of an increase in deposit rates, Certificates of Savings (CA) are becoming more attractive. Will they be the best alternative?

For the DECO specialist, within guaranteed capital and low-risk products, the answer is yes. Indexed to the 3-month Euribor, the gross base rate for November was set in the CAs at 2.492%, and even with a net rate of 1.79% (after deducting the IRS at a rate of 28%), it remains a reward which is not offered by a deposit.

While the best 12-month deposit offers a net interest of 1.2% on amounts over €50,000, AC can be subscribed from €100, António Ribeiro adds.

Vinay Prajivan, for his part, emphasizes that although the certificates are indexed to the 3-month Euribor, they have a maximum fee cap of 3.5%, but he points out that in a comparison of the fee rates they are still the best alternative to deposits.

“In the current context, the higher remuneration of CAs means that less value of the invested capital is lost through inflation than with an investment in deposits, the remuneration of which is close to 0%,” adds the specialist. But what about people who already had savings in Certificates, will they also benefit from Euribor increases?

It is important to mention that the subscription to Certificates is available through series, the only one currently available is the series E. But those who have subscribed to the previous series will also benefit from the increase in Euribor rates, since most of them are indexed at this rate, says António Ribeiro.

Series A and B are the only ones not indexed to Euribor, while series C, D and E, although with different calculation formulas, directly reflect the evolution of this rate.

In the series covered by Euribor, according to the IGCP, the accrued interest is determined monthly on the third-last working day of the month for the following month. In series D and E, the calculation formula is E3 + 1%, where E3 is the average of the three-month Euribor over the past ten working days.

Despite the attractiveness of the CA, the Portuguese had invested EUR 181.3 billion in bank deposits at the end of September of this year, of which almost EUR 4 billion in September.

Only 14.6 billion euros was invested in the CA at the end of September, 2.1 billion more than at the end of last year. In September, 702 million euros was invested in this product.