Britain’s biggest banks raise interest rate profits as earnings season kicks off

Sunday, April 24, 2022 11:47 a.m.

A higher interest rate environment benefits banks because it tends to widen their net interest rate spread – the difference between what they charge borrowers and what they pay out to depositors – which is a source revenue crucial for the sector

Earnings from Britain’s biggest lenders were boosted by the Bank of England raising interest rates to rein in historically high inflation.

That’s according to top City analysts who predict the UK’s biggest banks will have reaped the rewards of being able to charge borrowers more for loans.

A higher interest rate environment benefits banks because it tends to widen their net interest rate margin – the difference between what they charge borrowers and what they pay out to depositors – which is a source of essential revenue for the sector.

The Bank has raised rates at each of its last three meetings, bringing them to pre-pandemic levels of 0.75%. It is expected to raise them again at its next meeting on May 5, possibly by 50 basis points, breaking with its tradition of moving them in increments of 25 basis points.

But, a cooling in listing and deal-making activity due to heightened geopolitical risks triggered by Russia’s invasion of Ukraine, compounded by rising costs caused by an inflation crisis global, risks leaving shareholders with banks’ hands open, analysts predict.

The end of the Covid-19 restrictions in the middle of the first quarter should also have boosted income from traditional banking activities.

The “tailwind of rising interest rates and increased activity” should make banks one of the best performing sectors in the FTSE 100 this year, according to analysts at Shore Capital.

Lenders’ first-quarter earnings season kicks off on Tuesday when Britain’s biggest bank, HSBC, updates the town.

The bank, which makes much of its profits in Hong Kong and China, has been one of the sector’s flagships due to its high exposure to US interest rates, which have climbed in recent weeks due to an anticipated rapid tightening of US Federal Reserve policy.

Lloyds, the UK’s largest mortgage lender, reports results on Wednesday. The continued strength of the UK property market in the first three months of the year, despite higher interest rates and a compression in the cost of living, should have boosted the company’s results.

However, stiff competition in the mortgage market will have limited Lloyds’ profits.

A sudden and sharp contraction in listing activity amid heightened geopolitical uncertainty caused by Russia’s invasion of Ukraine is expected to have weighed on investment banking earnings.

Barclays, reporting on Thursday, is the only UK lender with a strong investment banking presence, meaning it will absorb the brunt of the weaker listing and trading environment.

The release of a loan loss reserve stream set aside to deal with an expected wave of Covid-19 defaults that artificially bolstered bank profits for about a year is set to dry up as the economy Britain shakes off the effects of the pandemic.

But, the worsening inflation crisis will lead to the release of loss provisions “recycled into new cost-of-living provisions,” according to Shore Capital.

UK living standards are set to fall at the fastest rate in 66 years due to the inability of wages to keep pace with an average annual inflation rate of over 7%.

The cost of living is already at a 30-year high of 7% and could even reach double digits later this year.

NatWest, which is now majority-owned by the private sector for the first time since the government bailed out the bank during the 2008 financial crisis, closes the UK banks’ earnings season on Friday.

On the continent, beleaguered lender Credit Suisse released its first-quarter results on Wednesday. Analysts expect the company has been hit with steep legal costs to deal with a series of crises that have dragged it into legal proceedings.

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