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Highlights:
- Interest and mortgage rates are rising, but the profits of LSE-listed lenders aren't going up despite higher revenue.
- Banks are anticipating more loan and mortgage defaults due to economic pressures.
British banks have been in focus amid the rising interest rates. Inflation is in double digits, and the Bank of England has been raising interest rates to tackle it since December last year. Moreover, since the previous chancellor Kwasi Kwarteng presented his disastrous mini-budget by announcing tax cuts worth tens of billions of pounds, mortgage rates have seen a steep rise.
The rise in interest and mortgage rates has made borrowing expensive, but it also has unlocked a key revenue stream for lenders.
Besides, this rise has impacted the quarterly results of London-listed lenders. Let us look at two such lenders who have recently posted their results.
NatWest Group (LON: NWG)
The leading FTSE 100-listed lender has released its numbers for the third quarter of this year, and its pre-tax profits were flat. The group posted pre-tax earnings of about £1.1 billion, slightly less than analysts' expectations of £1.2 billion. When compared with numbers for the same period last year, these latest numbers are largely unchanged.
The group's total income during the July-September 2022 period was £3.2 billion, a 16% increase on a like-for-like basis. While the rising interest rates benefited its revenues, the lender said it passed on about 25% to 30% of the higher interest rates to the savers since Q4 2021.
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NatWest has made a bigger provision for bad loans in the future due to economic challenges. It also expects to make more money this year as it raised its previous guidance of £12.5 billion to £12.8 billion in total income in 2022.
NatWest shares slipped almost 10% during the day on Friday.
Lloyds Banking Group Plc (LON: LLOY)
Lloyds reported its Q3 numbers on Thursday, indicating how lenders are struggling to increase their profits despite the rising interest and mortgage rates. Halifax's owner, the country's largest mortgage lender, posted pre-tax earnings of £1.5 billion. This is a 26% fall from last year's period, as the lender has put aside £668 million as protection against bad loans and potential defaults on mortgages due to the cost-of-living crisis.
Terming it a forward-looking charge, Lloyds said it would protect against the worsening economic conditions.
The net income rose 19% to £3.4 billion, but it was offset by what Lloyds called the impairment charge amid the deterioration in the macroeconomic outlook.
Despite the economic outlook, Lloyds was ready to help borrowers troubled by the soaring prices and high borrowing costs, its chief executive Charlie Nunn said.
Lloyd's shares slipped over 3.5% on Friday.
Note: The above content constitutes a very preliminary observation or view based on market trends and is of limited scope without any in-depth fundamental valuation or technical analysis. Any interest in stocks or sectors should be thoroughly evaluated taking into consideration the associated risks.
