British bank executives radiated an unexpected air of calm as they announced their second quarter results last week, defying growing concerns about the cost of living and its impact on businesses and consumers.
Major lenders, including NatWest, Barclays, Lloyds and HSBC, largely dismissed concerns about potential defaults related to weaker economic forecasts, with most announcing new payouts to investors and instead releasing money they had previously set aside for bad loans.
So why are banks so optimistic given the mounting pressure on household finances? We take a look at what we learned about the second quarter earnings season.
Vulnerable customers are struggling, but they haven’t borrowed from big banks
Lenders were candid about the impact 40 years of high inflation had on their poorest customers.
Lloyds said about 1% of its account holders were “really struggling to make ends meet”, while NatWest revealed that the lowest-income customers were already starting to experience fuel poverty – defined as spending more than 10% of their earnings on energy bills.
However, banks said this did not lead to an increase in defaults as few of those vulnerable customers actually borrow from large high street banks. That could be due to the fact that they wouldn’t have qualified for those loans in the first place.
It means that instead of setting aside cash for bad debt, banks can take less costly steps to address the cost of living crisis, including referring struggling customers to consumer charities, or building new ones. online budgeting tools.
Customers cut spending and some have more savings
Bank executives said many customers are in fact in a better financial position than they were before the Covid pandemic. That’s due to a drop in spending during lockdowns, which allowed borrowers to pay off debt and build up savings.
“They’re going into this environment in really much better financial shape than they would have been before the pandemic,” said Barclays’ chief financial officer, Anna Cross.
While NatWest said most customers spend about 20-30% more on “critical items” like utilities and fuel, consumers seem to be taking matters into their own hands. Lloyds said many were cutting back on subscription services like Netflix and avoiding big ticket items, including white goods and computers.
Cross explained that Barclays was monitoring behavioral changes, such as a new reliance on overdrafts or withdrawing money from credit cards, but hadn’t seen any red flags yet. “I think it’s because of the rational change around their own spending habits. But what we also saw during Covid was a real build-up of savings by consumers and even businesses, and the [subsequent] repayment in unsecured debt.”
NatWest boss Alison Rose added that nine of her bank’s ten mortgagees had also protected themselves from inflation and subsequent rate hikes by sticking to fixed rates.
Rising interest rates support bank income
While some banks, such as Lloyds Banking Group, set aside extra cash to cushion the blow of potential defaults, those costs were largely offset by higher revenues due to rising interest rates.
UK interest rates, which have been near record lows for most of the past decade, have risen from 0.25% last year to 1.25% today. It has allowed banks to charge borrowers more for loans and mortgages, in turn increasing their net interest margin – an important measure of profitability and growth.
Policymakers at the Bank of England are widely expected to raise interest rates again on Thursday, and lenders, including Barclays, think they could climb as high as 2.5% by the end of the year.
This could lead to a slowdown in house price growth and mortgages. However, Lloyds said it still expects its own lending rate to grow by single digits over the next 12-18 months.
Barclays also appears to be benefiting from the interest rate outlook, having bought specialist lender Kensington Mortgages for a £2.3bn deal last month.
Low unemployment gives banks hope
Lloyds revealed one of the most pessimistic forecasts: little or no growth in UK gross domestic product for the rest of the year and an increase of just 0.5% in 2023. That forecast will be influenced in part by inflation peaking at 10 percent. -11%, before falling in the second half of next year, the bank said.
However, Lloyds executives explained that they were still encouraged by the forecast for the UK unemployment rate, which is expected to remain stable at just under 4%.
“It’s a very different shock we’re experiencing compared to the last 25 years in British history. But there is much to learn from some of those past shocks the economy has gone through,” said Charlie Nunn, Lloyds CEO.
He said it is worth considering how emerging economies have dealt with similar economic situations in recent years. “I get a lot of personal experience from those experiences in places like Mexico, India and other parts of Asia where we saw really significant inflation, but the employment figures [were] high. There is quite a lot to learn from that.”