Glee For Banking Sector

Banks have been waiting years for a rising interest rate environment to boost revenues and margins. That time has finally come right in the midst of a cost of living crisis, but do they care?

The benefit to Britain’s large high street lenders from higher interest rates is plain enough. Rate rises are passed on in full to borrowers, (and yet another huge squeeze on your finances).

Here's an interesting statistic... for Lloyds Banking Group, each 0.25 percentage point rise adds around another £175m to net interest income. When interest rate expectations have risen by as much as 2 percentage points in a matter of weeks, that means a substantial improvement in profits, at the expense of all of us, again.

There is of course the risk that loan growth could slow. But, who really cares, as Banks already hold large books of mortgage debt with a low rate of churn.

Good news for Banks is that the point at which households are unable to pay their mortgage debt is years away, so why not milk it whilst one can...

According to the FT, three banks (Barclays, Lloyds and NatWest should increase their revenue by £12bn between 2022 and 2025 as margins expand and assets grow modestly. It’s not until the base rate moves above 6 per cent that the estimates of consumer loan loss rates start to shift materially.

But to state the obvious, it is hard to forecast the implications of a disorderly interest rate shock. Even if there is a sharp fall in house prices, what happens to unemployment will probably be more important. Households may remain resilient but the risks to corporate debt could be more complex.

The broader question will be about whether higher interest rates stick after the current downturn.

The future is bleak... unless we can use our voices to limit the damage.