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Bank interest rates rose less than money market rate
statistikk
2007-11-30T10:00:00.000Z
Banking and financial markets
en
orbofrent, Interest rates in banks and other financial enterprises, interest rates, interest on loans, deposit rates, interest margins, banks, mortgage companies, state lending institutions, life insurance companies, Norwegian Public Service Pension FundFinancial institutions and other financial corporations, Banking and financial markets
false

Interest rates in banks and other financial enterprises, Q3 2007

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Bank interest rates rose less than money market rate

Interest rates on loans from banks increased less than the money market rate in the third quarter of 2007. Interest rates on bank loans increased more than interest rates on loans from mortgage companies, life insurance companies and state lending institutions. The interest rate margin fell as bank deposit rates increased more than interest rates on loans.

Banks net interest earnings. NOK million. Banks interest rate margin, per cent. 4. quarter 2001-3. quarter 2007

Interest rate margin in banks. 1. quarter 2004-3. quarter 2007

While the money market rate (NIBOR) increased by 0.88 percentage points, the average interest rate on bank loans increased by 0.53 percentage points to 6.11 per cent in the third quarter. The average bank deposit rate increased by 0.55 percentage points to 3.92 per cent in the same period. Hence the interest margin fell by 0.03 percentage points to 2.19 per cent, the same level one year ago. While most of the banks increased their interest rate margin in the second quarter, most banks reduced their interest rate margin in the third quarter.

One important explanation for the development in the third quarter is that the banks have adjusted their interest rates to the increase in Norges Bank’s key policy rate on 28 June and 16 August while the money market rate also reflects the increase in the sight deposit rate on 27 September. Furthermore, in some banks the interest rate on new loans will not be adjusted to the interest rate rise in August until the fourth quarter.

The fact that banks’ interest rates increase more than interest rates in financial corporations may be because the banks have a lower share of fixed term loans. In addition, interest rates in state lending institutions are adjusted less frequently.

Interest rates in financial corporations1
 
  30.09.2007 30.06.2007 31.03.2007 31.12.2006 30.09.2006 30.09.2005
 
Total loans from banks 6.11 5.58 5.26 4.70 4.40 3.94
Total bank deposits 3.92 3.36 3.12 2.60 2.21 1.48
Banks' interest rate margin (1-2) 2.19 2.22 2.13 2.10 2.19 2.46
Lending rate, mortage companies 5.18 4.74 4.44 3.90 3.72 3.42
Lending rate, life insurance companies 5.42 5.08 4.79 4.37 4.20 3.99
Lending rate, state lending institutions 3.90 3.65 3.38 3.39 3.20 3.25
Total loans from financial corporations2 5.81 5.31 4.99 4.49 4.21 3.80
The Norwegian Public Service Pension Fund 4.83 4.31 4.06 3.54 3.29 ..
8. Nibor (3mnd. effective)3 5.89 5.01 4.60 4.02 3.52 2.50
Deposits margin (8 - 2) 1.97 1.65 1.48 1.43 1.31 1.02
Lending margin (1 - 8) 0.22 0.57 0.66 0.68 0.88 1.44
9. Banks. Repayment loans secured on dwellings 5.78 5.26 4.95 4.40 4.12 3.67
10. Banks. Credit loans secured on dwellings 5.48 4.96 4.64 4.09 3.69 ..
Banks. Lending margin repayment loans secured ondwellings (9 - 8) -0.11 0.25 0.35 0.38 0.60 1.17
Banks. Lending margin on credit loans secured on dwellings (10 - 8) -0.41 -0.05 0.04 0.07 0.17 ..
 
1  Weighted average interest rates incl. commissions on NOK loans from banks and other financial corporations. Weighted average interest rates on deposits in banks from non-financial enterprises, households and local government. Weighted average interest margins in banks. Per cent per annum.
2  Includes banks, mortgage companies, life insurance companies and state lending institutions. The Norwegian Public Service Pension Fund is not included.
3  Norges Bank.

Banks’ loan margin continues to fall

The banks’ lending margin fell by 0.35 percentage points while the deposits margin increased by 0.32 percentage points in the third quarter of 2007. The loan margin has fallen in every quarter since the first quarter of 2004, while the deposit margin has increased every quarter since the fourth quarter of 2005.

The interest margin on repayment loans and credit loans secured on dwellings fell to -0.11 and -0.41 per cent respectively in the third quarter of 2007. Calculations in Norges Bank’s financial stability report no. 2/2006 indicate that under certain conditions the lowest interest margin on mortgage loans with good security should not be lower than 0.4 - 0.8 percentage points in order to fulfil the capital requirements. The low loan margins for the third quarter may partly be explained by the fact that due to the 6-week notification deadline for interest rate increases on loans, the banks had not yet completely adjusted their lending rates to the increase in the key policy rate on 16 August and 27 September 2007.

Rise in net interest earnings despite lower interest margin

Although the banks’ interest margin fell in the third quarter, their net interest earnings (interest income less interest costs http://www.ssb.no/english/subjects/10/13/10/orbofrk_en/ ) increased considerably. The increase in net interest earnings is due to the increase in the value of loans by 3.4 per cent while the value of deposits fell by 0.8 per cent. In addition, the volume of loans is larger than the volume of deposits.

The interest margin is the difference between banks’ average lending and deposits rates. The lending margin is defined as the difference between banks’ interest rate on loans and the NIBOR rate. The interest margin on deposits is defined as the difference between the NIBOR rate and banks’ interest rate on deposits. Banks’ net interest income is defined as interest income less interest expenses in the profit and loss accounts.

 

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