Mortgage rates hoped to be nearing a peak as UK banks go under the spotlight

20 October 2023 , 13:21

959 0

UK interest rates have shot up from 0.1% to 5.25% in less than two years. (Image: PA Archive/PA Images)

The earnings of the UK's biggest high street banks and how their customers are coping with the cost-of-living crunch will be under scrutiny as the banks reveal their latest financial results. Barclays, Lloyds Banking Group and NatWest Group are set to share their third-quarter earnings and outlook for the year.

Investors will be keeping a close eye on these high street lenders for signs that customers are feeling the pinch from rising interest rates, which have increased borrowing costs throughout the year. A key figure in their financial results will be expected credit losses or impairments, indicating how much money banks are reserving to cover "bad debts" when customers can't keep up with loan repayments.

UK interest rates have shot up from 0.1% to 5.25% in less than two years. Barclays might put aside around £570 million according to an analysis consensus compiled for the bank, significantly more than the £380 million in credit impairment charges this time last year.

The global banking giant is predicted to report a pre-tax profit of £1.8 billion, down from the £2 billion reported a year ago. Peter Rothwell, the UK head of banking for KPMG, said the delay between interest rates rising and borrowers feeling the sting of higher costs could mean the large banks are starting to see the true impact on their customers.

He told the PA news agency: "At the moment, consumers and businesses are proving to be very resilient in the face of increasing pressure."

Teachers, civil servants and train drivers walk out in biggest strike in decade

"But realistically, how long can that continue to last?"

Mr Rothwell said investors will keep a close eye on the lenders' outlook, asking: "Are they still confident, or are they seeing some sort of decay of credit quality?"

"In my view, we need a bit of stability and certainty in the forward view for interest rates."

Lloyds Banking Group, which is the UK's biggest mortgage lender, said in July that more mortgage borrowers have struggled with higher repayments, with arrears increasing slightly.

Mortgage pressure is set to weigh on earnings in the latest quarter, but it could mark a period of "peak pain" for UK banks as the biggest challenges begin to fade, according to analysts at Barclays.

Lloyds is expected to report a pre-tax profit of £1.8 billion, up from £1.5 billion this time last year, according to a consensus of analysts.

And it is predicted to reveal an impairment charge of around £662 million, similar to last year's levels.

Analysts will also be paying attention to the net interest margin, which shows the difference between what a bank earns from loans and pays out for deposits.

Margins could slow as banks pay out more on customer deposits in a bid to reward savers.

NatWest Group, which also owns Royal Bank of Scotland, Ulster Bank and Coutts, is expected to report a pre-tax profit of £1.4 billion for the third quarter, up from £1.1 billion last year, according to experts. This comes as Coutts faces an independent review over its decision to close customer accounts, including that of former Ukip leader Nigel Farage, leading to the surprise resignations of NatWest's CEO Dame Alison Rose and Coutts' boss Peter Flavel.