UK Big 4 increase loan loss provisions

With interest rate hikes by the Bank of England (BoE) this year, all four of the UK’s biggest banks (HSBC, Barclays, NatWest and Lloyd’s) have recorded a surge in revenues and are taking advantage of higher billing differentials. Borrowers and what they pay savers.

For example, HSBC reached $8.6 billion in net interest income in the third quarter of 2022 (Q3). In the nine months to the end of September, interest alone generated $23 billion, up from $19.7 billion in the same period. last year’s period.

In light of rising bank margins, some UK politicians have called on financial institutions (FIs) to pay a windfall tax to fill the hole in the country’s budget gap. This is similar to his 4.8% tax on bank net interest. Income is assessed in Spain.

read: Government unfazed as multisector ‘windfall tax’ angers Spanish banks

Similarly, Sir Charlie Bean, former Deputy Governor of the Bank of England, Solution Foundation Event On Tuesday (1 November), such a move could potentially generate tens of billions of pounds of much-needed tax revenue for the UK government.

But whether or not this contingent tax sees the light of day in the UK, senior management at the country’s top banks have other pressing issues to tackle in the short to medium term.

see next: Rising Losses, SMBs and Digital Banking Define UK Big 4 Performance in H1 2022

Group CFO Ewen Stevenson warned investors on the earnings call that China’s property market was weakening, even though HSBC reported a third-quarter pre-tax profit of $3.1 billion better than analyst expectations. He said the economic downturn and Britain’s “gentle recession” were behind the decision to halt investment. He’s over $1 billion against expected loan defaults.

Related: Banks Expected to Raise Loan Loss Provisions for Third Consecutive Quarter

Similarly, in Barclays’ earnings call, CS Venkatakrishnan said a £381m ($438m) provision for bad debts was required due to “worsening macroeconomic forecasts”. I thought. By comparison, the figure is more than triple his £120m ($138m) that Barclays set aside for bad debt in the same period last year.

Falling prices, worsening outlook

HSBC and Barclays have largely managed to balance higher than expected default buffers and higher interest income, but the same cannot be said for Lloyd’s.

In fact, setting aside £668m ($768m) in anticipation of rising defaults was a key factor in the 26% year-on-year decline in profits for UK banks, with £1.8bn ($2.07 billion). Analysts were making forecasts for the quarter. Lloyd’s net profit margin jumped sharply to 2.98% in the fourth quarter, but he suffered a profit loss.

The UK’s largest mortgage lender also cut its economic forecasts to reflect the worsening outlook, predicting house prices will fall 8% while the economy will contract by 1% next year.

Lloyd’s Chief Financial Officer William Chalmers told shareholders that “so far, at least, our customers have adapted well to rising costs of living,” and the provision is forward-looking. and stressed that “credit costs remain below historical levels.” pre-pandemic levels. ”

NatWest also fell short of expectations as a result of a high charge for bad and doubtful debt provisions of £247m during the period.

“At a time of heightened economic uncertainty, we are acutely aware of the challenges facing people, families and businesses across the country,” NatWest CEO Alison Rose said in an earnings call.

“Although we have yet to see any signs of increasing financial distress, we are very aware of the growing concerns of our customers and are closely monitoring their financial and behavioral changes,” Rose added. rice field.

Ultimately, the fact that Britain’s Big Four banks have chosen to prepare for the worst speaks volumes to the imbalanced nature of the UK’s political and economic climate, as does the current repayment capacity of consumers and homeowners. I’m here. debt.

Indeed, in a country that narrowly avoided major pension fund failures at the height of September’s market crash, banks are choosing to play it safe and err on the side of caution.

References: Pound rebounds on first day of new UK prime minister, but import-export challenges remain

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