UK banking bosses would be well advised to take a page out of the Shell boss’s book when they report third-quarter earnings this week.
Ben van Beurden made waves earlier this month when the oil chief declared that the profitable energy sector should be taxed to help protect the poorest people from surging living costs. That was despite Liz Truss’s government having refused to claim a larger chunk of energy firms’ profits, even as she rolled out costly caps on gas and electricity bills.
While the future of the government and its tax policies are still in flux, banks are steeling themselves for a stealthy raid on their own healthy profits under Jeremy Hunt, chancellor at the time of writing, who is promising to leave no stone unturned in his efforts to plug a £40bn hole in the public finances.
How bank bosses respond to the threat of a higher than expected tax rate could have serious consequences for lenders’ fragile reputations just as they start to heal the damage done by the 2007-08 financial crisis. That recovery is already being tested by the government’s plans to press on with lifting the cap on banker bonuses, with lenders privately complaining that it will do little more than tarnish their relationship with the public.
While most high street lenders expect to see a drop in third-quarter profits, earnings at the likes of NatWest, Barclays, HSBC and Lloyds will still look buoyant amid poor economic forecasts.
The dip in profits will be due partly to tough comparisons with last year, when most lenders were releasing cash they had originally put aside for defaults during the Covid crisis. This year, they will have to put aside more cash to protect against soured loans – with struggling borrowers more likely to fall behind on mortgage or loan payments – but most will still report healthy earnings.
NatWest is expected to see quarterly profits rise from £1bn to £1.3bn. Analysts believe the bank, which is still 48% owned by the government, will take a £131m provision for potential defaults, having released £242m a year earlier. Meanwhile, forecasters expect rival Barclays’ profits to dip by just 8% to £1.8bn, despite the bank doubling its provisions to £330m.
Bank earnings will be helped by a jump in interest rates, from all-time lows of 0.1% last year to 2.25%, designed in part to tackle inflation that surged to 10.1% in September.
While higher rates raise the cost of borrowing for consumers, they are beneficial for lenders because they increase their net interest margin. The difference between what a bank charges for loans and what it pays in interest on deposits is a key measure of profitability.
Market volatility after the government’s disastrous mini-budget also pushed borrowing costs up, with the average two-year fixed mortgage rising past 6% for the first time since 2008 earlier this month.
Lenders will also benefit indirectly from the government’s energy price caps for both households and businesses, which will leave borrowers with more money to cover repayments of loans and mortgages.
And although higher living costs and interest rates could act as a drag on the housing market – with fewer customers potentially qualifying for or willing to take out fresh mortgages – lenders should also benefit from a boost in mortgage demand after the stamp duty cut announced last month.
Lloyds Banking Group, which owns Halifax and is the country’s largest mortgage lender, is expected to see a 9.5% drop in profits to £1.8bn, even after a £285m provision for bad loans.
The outlook is gloomier for HSBC, where profits are forecast to halve from $5.4bn to $2.5bn in the quarter. However, that is due to about $884m being put aside for potential defaults, compared with the $659m it released a year earlier.
Overall, even with the threat of a higher bank surcharge on the table, chief executives will be most concerned about stability. Some have even suggested that they would accept higher taxes if it meant less volatility and greater confidence in the UK, with one executive stressing that they would not be knocking down the door to No 11 Downing Street over the issue any time soon.