UK Banks: Mortgages bring an embarrassment of wealth

Homeowners watch as UK mortgage rates soar while their hearts sink. Some fixed-rate mortgage borrowers will lose their homes if refinancing burdens them with monthly payments they can’t afford.

This creates a problem for UK bank leaders. You’ve been waiting for better net interest income for years. But the sharp and not gradual increase will come with significant social costs. The unpredictable and fickle UK government could retaliate with price caps, if not windfall taxes.

Lenders were quick to adjust their lending rates as gilt yields surged. There are 9.5 million households with mortgages. Most are fixed rate loans. According to RBC research, these borrowers will face monthly increases averaging £500 on mortgage payments when they refinance. That assumes the Bank of England raises interest rates by another 1 percent, and the banks are passing that along.

UK banks are due to announce their quarterly earnings later this month. Lloyds, Barclays, NatWest and HSBC should have benefited well from higher net interest margins. The top three have the largest exposure to the UK credit and deposit markets. Overall, their net interest income alone is expected to grow by more than a fifth year-on-year, about £1.3 billion, in the quarter to September, according to consensus data from Visible Alpha. HSBC has a large part of its business in Asia and was expected to report a £2.4 billion rise.

However, there are ways to take the shine off net interest income gains in upcoming earnings reports. The weaker economic outlook in the UK could encourage banks to increase their buffers against bad loans. The three UK-focused banks have more than £3bn in excess provisioning buffers, known as management overlays, left over from the pandemic, Credit Suisse notes. These reflect internal bank views on the economic outlook. Strong pessimism would allow them to set aside more capital, which should hurt corporate profits.

Bank bosses and their shareholders are already moaning about paying a bank levy and a corporate tax surcharge. Rising mortgage rates will expose them to more raids. Avoiding this requires significant forbearance with distressed borrowers — as well as shrewd bookkeeping.

The Lex team is interested in hearing more from readers. Please let us know what you think in the comments below.

https://www.ft.com/content/52b4357e-5ed3-4f2e-913f-1de3ef4b6e78 UK Banks: Mortgages bring an embarrassment of wealth

Adam Bradshaw

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