Higher interest rates and rebounding loan demand to boost UK banks
A higher interest rate environment and a rebound in loan demand is set to boost Britain’s biggest lenders.
UK banks’ net interest margins will widen on the Bank of England and the world’s biggest central banks launching a rate hike cycle this year to tame inflation, analysts are betting.
Final quarter earnings for UK banks kick off next week, starting with Standard Chartered on Thursday, and are expected to show signs of a better year for profits for Britain’s high street lenders.
“We expect banks to make positive noises about the benefit of rising interest rates on net interest margins,” analysts at Shore Capital said in a note.
Higher borrowing costs lift banks’ profitability as they allow them to charge more for loans, widening the difference between what they pay depositors on savings and the amount they charge borrowers.
A recovery in demand for credit driven by the UK’s rapid recovery from the Covid-19 crisis encouraging consumers to take on debt and spend is expected to provide a boon for UK banks, which generate most of their income from retail banking activities.
State-owned NatWest reports on Friday, while Britain’s biggest bank HSBC and Barclays update markets the following week.
A flood of government support, combined with a stronger labour market and the health of the British economy is likely to have bolstered consumers’ credit quality, encouraging banks to ramp up lending activity.
“Credit quality across the banking industry appears to be robust with relatively low levels of arrears,” Shore Capital said.
The release of loan-loss reserves – money set aside by banks to deal with an expected wave of defaults caused by the pandemic – that have boosted lenders’ bottom lines throughout 2021 are expected to disappear this year.
Lloyds, Britain’s biggest mortgage provider, will benefit from the UK housing market running hot due to a relief on stamp duty and a rush to snap up larger homes with access to green space.
Lloyds will cap off banks’ earning season on 24 February.
A ramping up in investment spending to improve digital infrastructure is expected to eat into banks’ profits.
But, the picture for the banking sector in the year ahead is upbeat. Higher interest rates will offset increases in operating costs.
The scrapping of restrictions on share buybacks and dividends last year will mean stronger profitability among Britain’s top banks will boost shareholder distributions in 2022.