British bank chiefs exuded an unexpected calm when they released second quarter results last week, defying widespread concerns about the cost of living crisis and its impact on businesses and consumers.
Major high-street lenders, including NatWest, Barclays, Lloyds and HSBC, largely shrugged off worries about possible defaults linked to weaker economic forecasts, with most announcing new payouts for investors, instead freeing money they had previously set aside for distressed loans had.
So why are the banks so optimistic about the growing strain on household finances? We take a closer look at what we’ve learned during the second-quarter earnings season.
Vulnerable customers are struggling, but they haven’t borrowed from big banks
Lenders have been open about the impact 40 years of high inflation has had on their poorest customers.
Lloyds said around 1% of its account holders are “really struggling to make ends meet”, while NatWest revealed that customers on the lowest incomes are already on the cusp of fuel poverty – defined as spending more than 10% of their income on utility bills .
But the banks said that hasn’t translated into a spike in defaults, as few of those vulnerable customers are actually borrowing from large high-street banks. That may be because they would not have qualified for these loans in the first place.
That means banks can take less costly steps to deal with the cost-of-living crisis rather than setting cash aside for bad debts, including referring ailing customers to consumer organizations or developing online budgeting tools.
Customers are cutting back on spending and some have more savings
Bank executives said many customers are actually in a better financial position than before the Covid pandemic. This is due to a drop in spending during the lockdown, which helped borrowers pay down debt and build savings.
“They’re going into this environment in really much better financial shape than they would have been before the pandemic,” said Anna Cross, Barclays chief financial officer.
Though NatWest said most customers spend about 20-30% more on “critical things” like utilities and fuel, consumers appear to be taking matters into their own hands. Lloyds said many would cut back on subscription services like Netflix and avoid big ticket items like home appliances and computers.
Cross explained that Barclays is monitoring behavioral changes, such as B. renewed addiction to bank overdrafts or cash withdrawals from credit cards, but haven’t seen any red flags yet. “I think it’s because of rationally changing their own spending habits. But what we also saw during Covid was a real accumulation of savings from consumers and indeed businesses, and that [subsequent] Repayment into unsecured debt.”
NatWest chief Alison Rose added that nine out of 10 mortgage borrowers at her bank have also protected themselves against inflation and subsequent rate hikes by agreeing to fixed rates.
Rising interest rates support bank earnings
Although some banks, such as Lloyds Banking Group, set aside additional cash to cushion the blow of potential defaults, these costs were largely offset by higher revenues from rising interest rates.
UK interest rates, which have hovered near record lows for most of the last decade, have risen from 0.25% last year to 1.25% today. This allows banks to charge borrowers more for loans and mortgages, and in turn increase their net interest margin – a key measure of profitability and growth.
Bank of England policymakers are widely expected to hike interest rates again on Thursday, and lenders including Barclays believe they could rise to 2.5% by the end of the year.
This could lead to a slowdown in house price growth and mortgage lending. However, Lloyds said it still expects its own lending rate to grow in the single digits over the next 12-18 months.
Barclays also appears to be taking advantage of the interest rate outlook after buying specialist lender Kensington Mortgages for £2.3bn last month.
The low unemployment gives the banks hope
Lloyds unveiled one of its most pessimistic forecasts, forecasting little or no growth in UK gross domestic product for the rest of the year and a mere 0.5% increase in 2023. This forecast is partly influenced by inflation, which will peak at 10-11%. before declining in the second half of next year, the bank said.
However, Lloyds executives said they remained encouraged by forecasts for the UK unemployment rate, which is expected to remain steady at just under 4%.
“It’s a very different shock that we’re experiencing compared to the last 25 years in British history. But there is much to learn from some of the previous shocks the economy has endured,” said Charlie Nunn, chief executive of Lloyds.
He said it’s worth considering how emerging markets have dealt with similar economic situations in recent years. “I take a lot of personal experience from those experiences in places like Mexico, India and other parts of Asia where we’ve seen really significant inflation but employment rates [were] high. You can learn a lot from that.”