Investors began to speculate that the benefits from higher interest rates have peaked, and concerns about a possible recession grew.
UK banks are under pressure to increase their mortgage loan book as customers move away from fixed rate deals and onto higher rates. This is happening at a time where costs everywhere else are rising.
The Bank of England increased interest rates by a surprise half-point to 5%, the highest since 2008. Barclays’ shares dropped 3 percent to 147.28. Lloyds Banking Group fell 1 percent to 43.16. And NatWest lost almost 1 cent to 233.20p.
NatWest shares have fallen the most this year, by 14.5% and 9.0% in the last five days. Barclays shares have fallen by 9.5 percent in the last year, including nearly 4 percent in the past five. Lloyds shares are down 8 percent in the current year and 4 percentage points in the previous five.
Analysts say the recent fall in share prices reflects the market’s expectations of deteriorating quality of credit at UK banks, as rate increases hit consumer spending. This is despite banks publicly stating that they have not seen any real signs of stress on their loan portfolios.
” Expectations for interest rates are back to the levels seen last October. At these rates, you need to be worried about affordability pressures spreading to the wider economy and credit-quality. Investors are becoming more cautious about UK bank shares, according to Edward Firth of KBW.
The UK banks have not yet seen a decline in credit quality due to the rising levels of consumer stress. However, a senior banker warned on Thursday that “the pain was in front of us and not behind us”.
Richard Buxton, UK Equity Fund Manager at Jupiter, stated that the move in the share price reflected a “perception that higher rates will squeeze mortgage margins, and increase competition for deposits. Offsetting the benefits from higher rates.”
Some investors believe the move in the share price was a response to the comments of Rachel Reeves who suggested that the government force banks to assist homeowners struggling to repay their loans. David Cumming is the head of UK equity at Newton Investment Management. He said that populist anti-banking rhetoric in the long-term does not help consumers or the economic.
Last month, CS Venkatakrishnan told the Wall Street Journal CEO Council Summit that there are no signs of credit distress, except at the margins.
The speaker warned that homeowners who switch from fixed-rate deals would face a “huge income shock”. He said that the average household between 1990 and 2020 spent around 20 percent of its income in mortgage payments or rent.
William Chalmers (chief financial officer, Lloyds Banking Group) painted a similar image in May during an investor presentation when he stated that Lloyds’s mortgage book was “very high-quality” with a loan to value average of 42 percent.
He said: “We’ve seen a slight increase in arrears for the legacy variable rate books between 2006 and 2008, but the rest shows no movement at all.”