UK banks: mortgages are bringing an embarrassment of riches

Homeowners are watching UK mortgage rates soar skywards as their hearts descend to their boots. Some fixed-rate mortgagees will lose their homes when refinancings land them with monthly repayments they cannot afford.

This creates a problem for heads of UK banks. They have waited for years for better net interest income. But the sharp rather than gradual increase will come at glaring social cost. The UK’s unpredictable and vacillating government might exact vengeance via price caps, if not windfall taxes.

Lenders quickly adjusted their loan rate offers once gilt yields leapt. There are 9.5mn households with mortgages. Most are fixed-rate loans. These borrowers are confronted with increases of, on average, £500 a month for mortgage payments when they refinance, according to RBC research. That assumes the Bank of England raises interest rates another 1 per cent, and banks pass that through.

UK banks will announce their quarterly profits later this month. Lloyds, Barclays, NatWest and HSBC should have profited handsomely from wider net interest margins. The first three have the largest exposure to the UK lending and deposit markets. Overall, their net interest incomes alone should jump more than a fifth in the quarter through September year on year, about £1.3bn, according to consensus data from Visible Alpha. HSBC has a large chunk of its business in Asia and should report a £2.4bn increase.

Having said this, there are ways to take the shine off net interest income gains in earnings reports to come. The weakening economic outlook in the UK may encourage banks to add to buffers against souring loans. The three UK-focused banks have more than £3bn in surplus provision buffers, known as management overlays, left over from the pandemic, notes Credit Suisse. These reflect internal bank views on the economic outlook. Heavy pessimism would enable them to put more capital aside, which should reduce group profits.

Bank bosses and their shareholders already moan about paying a bank levy and a corporate tax surcharge. Soaring mortgage rates will expose them to further raids. To avoid that, substantial forbearance for distressed borrowers will be required — as well as clever accounting.

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