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There will be a decrease in earnings during the third quarter, but the majority of creditors will consent to have their accounts raided so that the government can improve its budget (and its image)
Regarding reporting their results for the third quarter this week, the heads of UK banks would be wise to steal a leaf out of the book that Shell’s CEO has written.
As the head of the oil industry, Ben van Beurden caused a stir this month when he suggested that the lucrative energy sector had to be taxed to shield the most vulnerable people from rising living expenses. This was the case even though the government headed by Liz Truss had declined to claim a bigger portion of the profits made by energy providers, even though she implemented price restrictions on electricity and gas bills.
Banks are bracing themselves for the stealthy attack on their healthy profits under the current chancellor, Jeremy Hunt, who promises to leave no stone unturned in his attempts to plug a £40 billion hole in the public finances. This is happening while the future of the govt and its tax plans are still up in the air.
How the heads of financial institutions react to the possibility of a higher tax rate than anticipated could have severe repercussions for the already fragile reputations of financial institutions at a time when these institutions are just beginning to recover from the damage caused by the financial crisis of 2007–2008. This recovery is already put to the test by the government’s intentions to move forward with eliminating the ceiling on banker bonuses, and bankers have been quietly grumbling that this would do nothing more than damage their reputation with the general people.
Even while most high street lenders anticipate a decline in third-quarter profits, the profitability of major banks such as NatWest, Barclays, HSBC, and Lloyds will still seem robust despite pessimistic economic projections.
The decline in earnings will be partially the result of making difficult comparisons with the previous year, which was a year in which the majority of banks were releasing cash that they had initially set aside for defaults during the Covid crisis. Most of them will still record excellent profits. However, they will have to set aside extra money this year to protect themselves against defaulted loans caused by financially troubled clients who are more likely to get behind on their mortgage or loan payments.
It is anticipated that NatWest will enjoy a boost in quarterly earnings from £1 billion to £1.3 billion. After having released £242 million in the preceding year, analysts predict the bank, which the government still controls to 48%, will make a provision for probable defaults for £131 million. Meanwhile, analysts predict that competitor Barclays’ earnings would only decrease by 8% to a total of £1.8 billion, although the bank has doubled its provisions to £330 million.
The increase in interest rates, from all low points of 0.1% last year to 2.25% this year, will benefit bank profitability. The interest rate increase was aimed partly at combating inflation, which jumped to 10.1% in September.
Although a rise in interest rates would make borrowing money more expensive for customers, it will be favorable for financial institutions since it will boost their net profit margin. One of the most important indicators of a bank’s profitability is the spread between the interest rates it charges for lending and the rates it pays out on deposits.
The instability of the market that followed the terrible mini-budget proposed by the government also contributed to an increase in the cost of borrowing money. Earlier this month, the average interest rate on a fixed-rate mortgage for two years surpassed 6% for the first time since 2008.
As a result of the government’s decision to place price ceilings on energy for both individuals and enterprises, borrowers will have more funds available to make payments on loans and mortgages, which will indirectly help lenders.
And although greater living costs and bond yields could act as just a drag just on the housing market – with fewer sales potentially having to qualify for or be willing to take out new mortgages – financial institutions should also benefit from an increase in mortgage demand following the announcement of a cut in stamp duty last month. The cut is expected to encourage more people to purchase homes.
Even after accounting for a provision of £285 million for delinquent loans, it is anticipated that Lloyds Banking Group, which owns Halifax and is the biggest mortgage lender in the UK, would suffer a decline in earnings of 9.5%, to £1.8 billion.
The projection for HSBC is not looking very bright, as earnings are expected to drop from $5.4 billion to $2.5 billion in the next quarter. However, this is because around $884 million was set aside for prospective defaults, a significant increase from the $659 million released per year earlier.
In general, even while there is the possibility of a larger bank levy being implemented, the most pressing worry for top executives will be maintaining stability. Some have even said they would be willing to pay higher taxes if something meant less instability and better trust in the UK. However, one executive emphasized that they wouldn’t be pounding on the door of No. 11 Downing Street soon regarding taxation.