Greek depositors are returning to a banking product that had been left unclaimed while the ECB was implementing a policy of zero or negative interest rates. Time deposits are again being targeted by savers who are chasing better returns and already the increase in their balances from the end of 2022 is more than 30%, while many depositors are willing to "lock in" their money even for two years in order to maximise the interest rate.
The balance of households' term deposits, data published yesterday by the Bank of Greece showed, has increased by €7.4 billion in the first four months of the year, or 30.7%, to €31.483 billion at the end of April.In the same period, the balance of savings deposits fell significantly, by €6.4 billion, from €114.9 billion at the end of 2022 to €108.5 billion.
Time deposits had become... pariah of deposit products in previous years, in an environment of zero or negative interest rates in the euro area, as banks effectively 'chased away' those who wanted to close their money by keeping interest rates on term deposits at a minimum differential from savings deposit rates, which were tending towards zero.
Significantly, while at the beginning of 2019, term deposit balances stood at €44.5 billion, by November 2022 they had fallen to their lowest level of this period, at €23.5 billion.
The big change in depositor behaviour was driven by banks waiting until February this year to materially change their policy on term deposit rates, even though the ECB's rate hike had begun last summer.
In February, the four systemic banks introduced a new generation of term deposit products which, despite individual differences, had one common denominator: they encouraged depositors to lock in their money for long periods of time, over a year, in order to secure interest rates that increased over time.
According to the Bank of Greece, the average interest rate overall in the time deposit category increased significantly in March, to 1.83% from 1.04% in December 2022. The new products for... patience had a direct impact on the behaviour of depositors, who turned to deposit products with an agreed maturity of more than one year. "The amount of new deposits in this category increased to EUR 3.6 billion in March 2023 from EUR 229 million in December 2022," the Bank of Greece noted.
After this sharp increase, in April, inflows into term deposits were held back to EUR 1.2 billion. However, the scope for growth is large in the coming months, as the BoE notes that "the partial conversion of savings deposits into time deposits started just a few months ago and is still ongoing, both in Greece and in the euro area."
Depositors appear to be more inclined to lock up their money later, when banks have raised interest rates even further, HSBC said in a report. According to its estimates, the share of term deposits in total balances will eventually reach 45%, roughly double from the current level.
For household deposits, this means that term deposits will have to increase by almost EUR 30 billion at the end of this cycle of mix change, reaching EUR 60 billion.
Largest interest rate increases from the second half of the year
Bank managements are in no hurry to satisfy savers' thirst for better returns, knowing that they have large liquidity reserves and giving priority to keeping interest rate margins at the highest possible levels for a long period of time. Moreover, the high degree of market concentration does not create competitive pressure.
Following the next, expected rate hike by the ECB, which may be the last in this cycle, it is expected that from autumn onwards, interest rates on fixed-term deposits will rise further, while, of course, savings deposit rates will remain close to zero.
Greek banks have considerable scope for additional increases in term deposit rates, incorporating the large increase in European interest rates and covering the large difference from the corresponding rates of other euro area banks:
- The interest rate that the ECB gives commercial banks on their deposits has risen to 3.25%, whereas until July 2022 it was negative (-0.50%). A small part of this increase has been passed on to depositors in Greece.
- As the BoE noted in its latest Financial Stability Report, "deposit rates (new contracts) in Greece - during 2022 and the first months of 2023 - are among the lowest in the euro area. After July 2022, the weighted average deposit rate for new contracts is among the lowest rates and in February 2023 stood at 0.21%."
- Even the already elevated interest rates on fixed-term deposits are still very far from the euro area average. According to ECB data, in March the average interest rate on household time deposits had risen to 2.11%, even though the overnight deposit rate stood at 0.15%. Similarly, the average interest rate on Greek time deposits was about half the euro area average, at 1.16%. Only for the category of deposits with "closing" money for more than one year it rose to 1.83%.
The repricing of term deposits is expected to accelerate in the second half of the year and all indications are that the biggest winners will be depositors who were not in a hurry to close their money immediately after the first wave of interest rate hikes. In any case, the higher interest rates will be given by banks to those who agree to tie up their money for more than a year, since, as the Hellenic Bankers Association stressed in a recent statement, 'deposit durations of 'more than 1 year are the desired durations, based on supervisory guidelines'.
The new generation of futures
According to the announcements made in February by the banks, the new generation of term deposits has as its main feature a staggered increase in yields. In particular:
Piraeus Bank: The term deposit "In Your Measures" gives a fixed interest rate of up to 2.00% in 12 months, for the entire term, depending on the amount of the term deposit.
The staggered term deposit "Increase" gives an interest rate of up to 2.75%, depending on the amount deposited, for a 12-month term deposit, with a quarterly staggered interest rate. For example, if based on the deposit amount, if the maximum closing interest rate is 2.75%, then the interim interest rates will be 0.75%, 1.40%, 2.30% & 2.75% for the first, second, third and fourth quarter, respectively. Interest shall be paid quarterly.
The "Can" savings account offers an interest rate of 1.00%, irrespective of the balance, to reward regular savings, as noted by Tr. Piraeus.
National Bank: The new 15-month term deposit, with an interest rate of up to 3%, has an incrementally scaled return per quarter reaching up to 3% in the last 3 months, and an annualized guaranteed return of 2%. The minimum deposit amount is EUR 10,000.
The new 18-month term deposit gives an interest rate of up to 2.3%. The interest rate is from 1.5% to 2.3% for amounts from 20,000 to 200,000 euros.
The new 12-month term deposit offers an interest rate of 1.7% for amounts from €200,000 and above, 1.5% for amounts from €20,000 to €200,000 and 1% for amounts up to €20,000.
Alpha Bank. It recently increased the interest rates of Alpha Progress Plus by 0.80% to 1.00% for 12 and 24-month term deposits. Yields gradually increase every quarter, reaching up to 3%, depending on the amount and duration of the deposit. Alpha Progress Plus provides the interest quarterly, and offers the possibility to increase the deposit amount, as well as the flexibility to stop at the end of each quarter, at no cost.
Specifically, these are term deposits with attractive returns depending on the deposit amount: for a 12-month term, the interest rate is up to 3% and the average interest rate is from 1.25% to 1.75%. For a term of 24 months, the interest rate is also up to 3% and the average interest rate is between 1.50% and 2.00%.
Eurobank: The bank offers two basic time deposit products with staggered interest rates and a term of 12 or 24 months.
For a 12-month term deposit, it offers staggered interest rates of 1,0 % and 2,0 % in the first and second half of the year, respectively, and interest payments on a quarterly basis.
For 24-month fixed-term deposits, interest rates of 1.0%, 1.5%, 2.0% and 2.5% are offered in the first, second, third and fourth semesters, respectively, and interest is paid on a quarterly basis.