The UK’s high street banks have warned that the boon from rising interest rates might be coming to an end as changing customer behaviour and an increasingly competitive mortgage market hits margins.
Natwest, Barclays and Lloyds recorded bumper profits last week, but investors were dismayed by the more cautious outlook.
Both Natwest and Barclays UK lowered their forecast for the full-year net interest margin (NIM) on the back of an increasingly competitive deposit and mortgage market.
NIM measures the amount of money a bank is earning in interest compared to the amount it is paying in interest on deposits.
While Lloyds upped its full year NIM, its margin in the second quarter fell against the quarter before pointing to increasing competition.
Tomasz Noetzel, analyst at Bloomberg Intelligence, noted that the downgrades “sum up the intensifying pressures in the domestic mortgage and deposit markets”.
All the banks reported that customers are increasingly shifting deposits into higher yielding savings accounts while many are using excess savings to pay down debts as well.
At Natwest the proportion of deposits in non-interest bearing accounts fell from 40 per cent to 37 per cent with many customers moving into fixed-term accounts.
Finance chief Katie Murray said “we’re definitely seeing much more active management of people’s deposits, which is a very sensible thing for them to be doing.”
Similarly Barclays’s CFO Anna Cross said that customers are “more sensitive” to rising rates and are acting “very rationally and very proactively”.
“They’re deleveraging – we’re seeing more than a quarter of our mortgage customers overpay on their mortgage – and then many are managing their savings to get a higher yield. It’s as simple as that,” she said
On the mortgage side, William Chalmers, CFO at Lloyds, said “mortgage margins are at exceptionally low levels”. He noted that customers refinancing mortgages are moving off margins of around 180 basis points onto around 50 basis points today, a significant decrease.
With tightening margins, all eyes will turn to how HSBC performs on Tuesday alongside Metro Bank. Virgin Money will report on Wednesday.
Despite concerns in the rest of the market, analysts at Jefferies reckon that HSBC might lift its net interest income guide for the year from $34bn to $36bn
Any upgraded guidance would likely reflect “a promising turnaround in macro conditions in Hong Kong and mainland China and better than feared growth in the UK”, analysts at UBS said.
