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Banks (Finance)

UK Banks Slump on Worries of Bad Debts and Windfall Tax

Strategic Insights

— 2 min read

As the Bank of England raises interest rates to combat a faltering housing market and increasing cost-of-living pressures, the UK banking sector is bracing for a potential increase in bad debts and a back-door windfall tax. Shares in FTSE 100 lenders, including Lloyds Banking Group PLC (LSE:LLOY), NatWest Group PLC (LSE:NWG), Barclays PLC (LSE:BARC), and HSBC Holdings PLC (LSE:HSBA), have slumped in recent days, with some experiencing their worst losses in months.

Key Takeaways:

  • Santander UK is preparing for more customer defaults, with a "very slight increase" in the number of customers falling behind on mortgage, cards, loans, and overdrafts, according to its chief executive.
  • The bank has seen a "small uptick" in net interest margin (NIM) over the past two quarters, reflecting the difference between what banks charge for loans and pay out for deposits.
  • The Treasury is weighing up options to tap banks for cash through a windfall tax, which could amount to a £10bn back-door raid on the sector, according to a report from Bloomberg last month.
  • The windfall tax could reduce the gross net interest income benefit for a bank like Lloyds from around £4.5bn to roughly £2.9bn at a base rate of 3% over the medium term, analysts at JP Morgan have calculated.
  • Banks hold significant cash balances at the Bank of England, earning the UK base rate, which accounts for up to 27% of net interest income at NatWest based on a base rate of 2%.
  • The UK banking sector is set to post Q3 results over the next few weeks, amidst concerns over bad debts and the windfall tax.

Statistics:

  • The Bank of England has raised rates from almost zero to 2.25% since December last year.
  • The UK base rate is set to rise potentially significantly higher, with markets looking for 4.5% by next year.
  • A windfall tax could reduce Lloyds' gross net interest income benefit by £1.6bn, according to JP Morgan calculations.
  • NatWest holds £148bn in cash at the Bank of England, followed by HSBC at £89bn, and Lloyds at £79bn.
  • OSB Group PLC (LSE:OSB) holds £3bn in cash at the Bank of England, while Virgin Money UK PLC (LSE:VMUK) holds £10bn.

Sources:

  • The Guardian
  • Bloomberg
  • Barclays PLC (LSE:BARC)
  • JP Morgan
  • Bank of England
  • NatWest Group PLC (LSE:NWG)
  • HSBC Holdings PLC (LSE:HSBA)
  • Lloyds Banking Group PLC (LSE:LLOY)
  • OSB Group PLC (LSE:OSB)
  • Virgin Money UK PLC (LSE:VMUK)

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