A $58.6bn jump in mortgage costs fuels risk for UK lenders

Bloomberg

A surge in bad loans awaits UK banks as higher interest rates saddle homeowners with an estimated £52 billion ($58.6 billion) of added mortgage payments over the next three years, an analyst warned as
he downgraded his ratings on several lenders.
The jump in costs will help push the personal debt service burden towards about 10% of post-tax income and further into the “dangerous territory” traditionally associated with large increases in impairments, Keefe, Bruyette & Woods analyst Ed Firth wrote in a note to clients. He cut his estimated earnings for British banks by 38% for 2023 and 26% for 2024.
Shares of UK lenders have tumbled in recent weeks following a surge in gilt yields spurred by a chaotic government push to cut taxes, since largely abandoned, as the Bank of England also raises interest rates aggressively to tamp down on inflation. While higher borrowing costs swell the margins that banks earn on their loans, they also threaten to drive up defaults as loans become more expensive to pay back and economic activity slows.
“Higher rates are better for returns, but only if achieved in a calm, predictable manner,” wrote Firth. “They need to be just right — not too hot and not too cold.”
The BOE is set to increase its main rate to 3% next month, Bloomberg economist Ana Andrade wrote after data showed consumer inflation rises to 10.1% in September. Meanwhile, the average two-year fixed-rate home loan jumped to 6.53%, pushing above a 14-year high reached last week, according to data from Moneyfacts Group Plc.
While bank shares are not expensive and already price in much of the risk, “the headwinds do warrant a more balanced approach,” Firth wrote, noting that UK rates are expected to hit about 5% next year.
He downgraded Lloyds Banking Group Plc, Metro Bank Plc and Provident Financial Plc to underperform, the equivalent of sell. NatWest Group Plc, meanwhile, was cut to market perform from outperform.
Banks also took a hit from a report in the Financial Times saying Chancellor of the Exchequer Jeremy Hunt could slap more tax on banks to help plug a shortfall in government finances. Lloyds was down 4.6% as of 10:20 am in London, while NatWest falls 2.9% and Barclays Plc slipped 2.5%.
“Banks are making lots of money and have passed on hardly any of the interest rate rises to customers,” Firth added when asked about a potential windfall tax. “They have only themselves to blame.”