Ok, I was wrong. I really thought that rising interest rates to over 5% over the last four years would cause greater stress in bank loan books. Yes, commercial real estate loans are causing angst in the global financial system but thanks to private equity, pension funds and family offices it’s not just the banks on the hook this time. Clearly, the rise of private investment vehicles in financial markets has helped to de-risk the banking system. Of course, the investor muscle memory of the 2008-2009 credit crisis has had a double impact too. First, consumer protective regulation has forced banks to build huge capital buffers (reserves). Second, bank customers through a combination of lack of finance education, risk aversion and behavioural inertia have added to those buffers. European bank customers in particular have left trillions of euros of cash in the bank earning almost no interest because they have not sought out specific interest-earning deposit or money market accounts. Ireland, with almost €150 billion euro sitting in accounts earning miniscule interest, is the worst European offender.  Here are the numbers:  

• Across the EU banking system there is €16 trillion of customer cash sitting in bank accounts.

 

• 54% of that cash earns on average 0.13% in low-interest overnight accounts. Implicit in that number is that 46% of customer cash is in longer-term deposit accounts. In other words, almost half of European bank customers commit cash to ‘term deposit accounts’ which, in exchange for waiving access to the cash over defined time periods, pay depositors average rates of 2.65%.

 

• Ireland has a VERY different mix of customer behaviours. Just 12% of customer cash earns income in term accounts. A whopping 88% of Irish cash sits in overnight accounts, earning almost nothing.

  Clearly, this is a win, if not a scandal, for Irish banks. On the other hand, the European banking system is in pretty good shape, steering capital away from higher returns but also higher risk. As an illustration of the European bank risk culture, I was staggered to see that US banking giant, JP Morgan, has a market value of $540 billion which exceeds the combined value of Europe’s top 10 banks. So, Europe’s banks are doing ‘ok’ but not exactly chasing higher returns for their shareholders which translates into underwhelming valuations. However, if you thought this was a hit piece on banks you’d be wrong. The other eye-popping data point I discovered this week was that in the critical world of customer experience (CX) – now a main priority for 80% of companies per Gartner – banks in seven major economies outside Ireland now top the CX league tables. That just wasn’t on my 2024 bingo card. In fact, that banking ‘bingo card’ is putting together a very interesting string of numbers….  

• US and global stock markets are hitting all-time highs again after August wobbles. Yes, the US tech sector has been the star sector of the last 12 months (+42%) but you might be surprised to see US Banks in second spot with a 29% return.

 

• Euro area banks handed out €71 billion in loans for house purchases by consumers in July, the highest level since August 2022.

 

• Italy’s Unicredito bank is signalling increased executive confidence with a shock swoop for a 9% stake in Germany’s Commerzbank. The Italians have asked permission of the German government to pursue merger discussions. Wow. Cross-border M&A featuring major European banks has not been seen for years.

 

• Europe’s financial markets are increasingly pricing in climate-related risks. ECB reports that eurozone banks were charging companies in the top 25% of carbon emitters monthly interest rates 14 basis points higher on average than those in the lowest 25%

 

• You may not have heard of Tether but it is a fintech platform specialising in trading digital currencies which track/tether to traditional major currencies using blockchain. These asset-backed digital instruments are known as stablecoins. Tether has 350 million stablecoin users globally and, incredibly, has generated more profit ($12 billion) than the world’s biggest asset manager, Blackrock, and its $10 trillion portfolio since early 2023.

 

• Perhaps it’s no big surprise that Revolut is reportedly about to launch a stablecoin for its 45 million customers, of which 2 million reside in Ireland.

  One of the other big messages in the CX world these days is that brands suffer without innovation. Keeping the status quo is really going backwards. We have written before about the massive data/AI opportunity for banks and the ultimate platform play: payments. Trillions of dollar wealth has accrued to innovators in the social media and cloud computing platforms. Now, it could be the turn of payments to deliver trillion dollar opportunities. While we write of opportunities might we suggest another?   As tax-return season kicks in, private investors should note that EIIS tax-friendly opportunities just became more lucrative. Thanks to changes in last year’s Finance Bill, many investments in early-stage companies currently attract 50% income tax rebate opportunities for Irish investors. Now, think about all that cash sitting in bank accounts with inflation of say 3.5% eroding its purchasing power. Here is a quick illustration of wealth destruction:  

• Keep €20,000 in overnight deposit as usual.
• Hold for 10 years while asset prices inflate by 3.5% per annum.
• Spend the €20,000 after 10 years but get only ‘value’ of €14,000 due to asset inflation/purchase power erosion.

  Or….. try this EIIS investment strategy.  

• Invest €20,000 in portfolio of 7-8 early stage companies.
• Receive €10,000 back in income tax rebates.
• In 10 year’s time, if your €20,000 investment has returned just €4,000, you have beaten the bank.
• That €4,000 hurdle requires just one of your investments to double in value while all the others go to zero.

  Gotta be worth thinking about. Certainly, if you’re sitting on cash which will lose 30% of its purchasing value over the next 10 years. Better still, move some money into term deposit accounts and look for 3% long-term rates. Then think about using EIIS to offset the taxes on that deposit income. In the “real” world of tax savings that 3% interest earnings (offset with EIIS rebates) on your deposit equates to a 6% gross return typically promised on other types of assets, like a property or multi-asset wealth portfolio. Definitely worth a chat with your accountant.   Finally, from a Spark perspective, we can promise our investors a very interesting pipeline of up to 8 EIIS deals spread across SaaS software, biopharma, medtech, ESG/sustainability and AI before Santa arrives and the EIIS window closes for 2024. And, if we were in Santa letter-writing mood we’d be tempted to ask government and banks to join the dots and incentivise specific support for small early-stage businesses via bank deposit accounts. Showing my age here, anyone remember SSIA’s of the early naughties? Answers on a post card to Apple or the Department of Finance with a recent €14 billion windfall/capital infusion to kick things off….