Lloyds (LLOY) & Barclays (BARC): Should you hold these banking stocks?

Highlights

• An estimated 2.5 million UK households have either missed or defaulted on at least one payment in January 2022.
• The rising number of interest payment defaults amongst the UK residents might negatively impact the banking stocks, especially those operating in mortgage lending and credit cards business.

The rising inflation in the UK economy is leading to a higher cost of living for the residents. An increase in food and energy prices had been badly impacting household savings. As per the recent survey conducted by the consumer insight company, Which? An estimated 2.5 million UK households have either missed or defaulted on at least one payment of the mortgage, rent, credit card, other loans or bills in January 2022, indicating a sizeable rise in non-payment compared to the previous month, when around 1.7 million people were estimated to have defaulted.  

The monthly online poll used survey results of around 2000 adults to collect the estimates, which was conducted by Yonder on behalf of Which?. Default rates increased across the segments, including mortgage, credit card payment, rent or monthly bill payment. According to the survey, more than half of the people were impacted by a significant rise in food and energy prices.

The rising number of interest payment defaults amongst the UK residents might negatively impact the banking companies, especially those operating in mortgage lending and credit cards business, as these are direct loans given to retail consumers.

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Let us look at 2 FTSE listed banking stocks that could be impacted due to rising defaults:

Lloyds Banking Group Plc (LON: LLOY)

FTSE 100 listed lender provides retail and commercial banking services to its clients. It is one of the largest mortgage lenders in the UK. Mortgage lending makes up a large part of the company’s loans and advances to customers. As of 30 September 2021, the total UK mortgage was at £308,289 million.

As per the last business update, the bank reported a stable outlook with lower defaults amid the recovery in the UK economy. It reported a total income of £11,072 million in the first three quarters of 2021. However, at the start of the pandemic in 2020, the lender has kept aside £2.4 billion as a provision for bad loans as it predicted higher default rates during the first lockdown in the UK.

Lloyds Banking Group Plc’s last close was at GBX 52.03, with a market cap of £36,953 million as of 25 January 2022.

Barclays Plc (LON: BARC)

The company provides various financial products and services to retail and institution clients in the UK and other countries. Barclays is reported to be one of the major credit card issuers in the UK. For the nine months to 30 September 2021, the company reported £16.8 billion in revenue.

It currently has a strong business outlook with lower provisions towards bad loans. The company expects to deliver a return on tangible equity (RoTE) of above 10% in 2021. The bank had previously given warning signs during the pandemic period when non-payment of loans was rising.

Barclays Plc’s last close was at GBX 202.90, with a market cap of £33,873 million as of 25 January 2022.