UK savers moved decisively into cash ISAs in April, pushing time deposits up 3.1% while sight deposits fell 1.6%, according to Bank of England data. That shift is typical for the start of the tax year, but it carries real implications for bank margins.
Time deposits cost more to service than instant-access cash. So even though the rates on individual products were broadly flat or lower, the overall mix pushed the average deposit rate up slightly to 2.23%.
That nudged deposit betas higher to 48%, meaning more of the interest rate environment is flowing through to depositors and less is being retained by the banks.
This is the pressure point UBS is watching: Rising funding costs erode net interest margins just as the market is warming back up to the sector.
UBS still sees value. It has 'buy' ratings on Barclays PLC (LSE:BARC), NatWest Group PLC (LSE:NWG) and Paragon Banking Group PLC (LSE:PAG), all of which are expected to deliver strong revenue growth.
These stocks are trading at just 7.6 times forecast 2026 earnings, with returns on equity approaching 15%.
UBS is more cautious on Lloyds Banking Group PLC (LSE:LLOY) and Close Brothers Group PLC (LSE:CBG), both rated 'neutral'.
While they may benefit from the same interest rate tailwinds, their slower growth profiles and potential margin sensitivity put them in a less favourable position if funding costs rise faster than expected.
The key takeaway is this: the flow into ISAs and term deposits may look like a healthy sign of financial discipline, but for banks, it raises the cost of doing business.
That may cap the upside on margins, even if loan growth and fee income continue to improve. In a market hunting for reliable income and earnings visibility, how each bank manages that margin squeeze will matter.