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A £52b jump in mortgage costs fuels risk for UK lenders

Updated: Apr 5

Truss tells MPs she will raise pensions in line with inflation

Mortgage displayed using cubes

A reduced analyst's rating on numerous institutions foreshadowed an increase in bad loans for UK banks as rising interest rates burden homeowners with an extra £52 billion (S$83.2 billion) in mortgage payments over the following three years.

The increase in expenses will assist in bringing the personal debt service burden closer to 10% of after-tax income and deeper into the "dangerous region" typically linked with sharp spikes in impairments. Analyst Ed Firth of Keefe, Bruyette & Woods stated in a letter to clients on Wednesday (Oct 19). He reduced his projected earnings for British banks by 38% in 2023 and 26% in 2024.

Shares of UK lenders have fallen recently as a result of rising gilt yields brought on by a messy government effort to slash taxes, which has now been mostly abandoned, and as the Bank of England aggressively hikes interest rates to combat inflation. As loans grow more expensive to repay and economic activity slows, greater borrowing costs threaten to increase defaults while simultaneously increasing the margins that banks receive on their loans.

According to Firth, higher rates are preferable for returns, but only if they are attained in a steady, orderly fashion. They must be at the perfect temperature—neither too hot nor too chilly.

After statistics showing consumer inflation increased to 10.1% in September, according to Bloomberg economist Ana Andrade, the BOE is expected to boost its main rate to 3% next month. According to data from Moneyfacts Group, the average two-year fixed-rate mortgage increased to 6.53 percent on Tuesday, surpassing a 14-year record set last week.

Firth wrote that the headwinds "do justify a more balanced strategy," noting that UK rates are anticipated to hit around while noting that bank shares are not costly and already price in much of the risk.

He downgraded Metro Bank, Provident Financial, and Lloyds Banking Group to underperform, which is the same as selling. Meanwhile, NatWest Group's rating was downgraded from outperform to market perform.

A Financial Times report on Wednesday that suggested Chancellor of the Exchequer Jeremy Hunt would impose higher taxes on banks to help close a budget gap hurt banks as well. As of 10:20 am in London, Lloyds was down 4.6%, NatWest was down 2.9%, and Barclays was down 2.5%.

In response to a question regarding a prospective windfall tax, Firth continued, "Banks are generating tonnes of money and have rarely passed on any of the interest rate rises to customers." "They are only responsible for themselves." BLOOMBERG



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