The BoE’s August Monetary Report notes if rates turn negative then deposit-taking institutions probably can’t take deposit rates below zero in response as customers would hoard physical cash.
As a result, the profit margins the banks make on the spreads between lending and deposit rates could narrow the most yet in the current rate-cutting cycle.
Virgin Money’s net interest margin in the UK fell 16 basis points over the June quarter to just 1.47 per cent.
Broker Bell Potter cut its valuation on the bank 10 per cent to $1.80, suggesting if UK cash rates go lower then it’ll struggle to reprice its savings rates offered to depositors.
Banks most reliant on retail deposits for funding are the most exposed to negative rates, according to the BoE. Bell Potter reported 79 per cent of Virgin Money’s funding came from retail deposits in the second half of financial 2020.