Homeowners watched as UK mortgage rates soared and their hearts sank into their boots. Some fixed-rate mortgage lenders will lose their homes when refinancing makes them unable to afford their monthly payments.
This creates problems for those in charge Bank of England. They have been waiting for better net interest income for years. But sharp rather than gradual growth will come at clear social costs. Britain’s unpredictable and wavering government could retaliate with price caps, if not windfall taxes.
Once gilt yields jump, lenders quickly adjust their lending rates. There are 9.5 million households with mortgages. Most are fixed rate loans. According to RBC research, these borrowers face an average monthly increase in their mortgage of £500 when they refinance. This assumes the Bank of England raises rates by another 1%, and the banks pass that.
The Bank of England will report its quarterly profit later this month. Lloyds, Barclays, NatWest and HSBC should have made decent profits from wider net interest margins. The top three have the largest exposure to the UK lending and deposit markets. Overall, their net interest income alone should have grown by more than a fifth year-on-year to around £1.3bn in the quarter to September, according to consensus data from Visible Alpha. HSBC, which has a large part of its business in Asia, should report growth of £2.4bn.
That being said, there are ways to eliminate the net interest income gain in the upcoming earnings report. Britain’s weak economic outlook could encourage banks to increase their buffers against bad loans. Credit Suisse noted that the three UK-focused banks have a surplus provision buffer of more than £3bn, so-called management coverage, left over from the pandemic. These reflect the bank’s internal view of the economic outlook. Serious pessimism will allow them to put more capital aside, which should reduce the group’s profits.
Bank bosses and their shareholders have complained about paying bank taxes and corporate surcharges. Soaring mortgage rates will expose them to further attacks. To avoid this, substantial forbearance — and clever accounting — for troubled borrowers will be required.
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