UK banks return to amassing default reserves amid inflation and mortgage crunch
UK banks are setting aside millions of pounds to cope with an expected wave of defaults sparked by the cost of living crunch and rising mortgage rates squeezing household finances.
Spanish lender Santander, which has a big presence on UK high streets, today said in the three months to September it injected £138m into its war chest to deal with a rise in borrowers not paying their debts.
Barclays UK today said it had banked £81m in loan loss reserves in the three months to September, compared to a buildup of £137m last year.
The duo join the swelling list of banks who have returned to cobbling together huge piles of cash to absorb souring loans, just as they did during the pandemic.
Barclays’s chief, C. S. Venkatakrishnan, said the firm is “ready to provide support for customers and clients facing an uncertain economic environment”.
Household finances are under intense pressure from inflation reaching a 40-year high of 10.1 per cent and mortgage rates climbing above six per cent, raising the risk of an uptick in defaults.
The Bank of England has hiked borrowing costs seven times in a row, including two back-to-back 50 basis point rises, to 2.25 per cent.
That rate hike cycle, compounded by Liz Truss’s botched mini-budget jolting UK debt markets, has pushed mortgage rates higher.
The Bank is expected to raise rates by at least 75 basis points next Thursday.
Lloyds Bank, the UK’s largest mortgage lender, releases earnings at the market open today, with the City closely watching to see if it provides an explanation on how fragile the mortgage market is.
“Significant stress [is] building in the mortgage market… against this backdrop it is difficult to see Lloyds shares outperforming,” analysts at Morgan Stanley said.
Despite provision growth, lenders have smashed analysts’ expectations during third quarter earnings season.
Barclays’s group profits hit £1.97bn, up six per cent, while Asia-focused lender Standard Chartered registered a 40 per cent profit jump compared to last year.
Santander’s group profits climbed three per cent to €2.42bn (£2.11bn).
Barclays’s net interest income climbed to £3.1bn from £1.94bn in the same period last year, widening its net interest margin to 3.85 per cent.
A bank’s net interest margin is the difference between what it charges for loans and pays depositors. It is a key indicator analysts examine for signs of profitability in the sector.
Standard Chartered’s net interest income climbed 11 per cent over the last year, widening its net interest margin to 1.43 per cent.
Both banks have heavy exposure to economies beyond the UK, meaning they have reaped the benefits of central banks around the world lifting borrowing costs steeply to tame inflation.
The bigger than expected profit take from Barclays and Standard Chartered could ignite further calls to launch a tax grab on the banking sector to help repair the UK’s damaged public finances.
Chancellor Jeremy Hunt is reportedly mulling reversing the bank surcharge tax cut from eight per cent to three per cent.
UK banks have been subjected to a tax surcharge of eight per cent on top of corporation tax for several years, largely seen as a retaliatory fiscal measure in response to their role in triggering the 2008 financial crisis.
Standard Chartered finished bottom of the FTSE 100 today, shedding more than five per cent. Barclays lost 0.27 per cent.
Santander’s London-listed shares closed 3.01 per cent lower.