UK banks set to score sharply higher rates as European peers lag

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UK banks are poised to benefit from rising interest rates, with lending revenue expected to rise more sharply than their European peers over the rest of 2022.

Net interest income, or NII, for UK banks with assets over £100bn is expected to rise 16.3% year-on-year in 2022, compared to 1.8% for European banks in similar size, according to analyst estimates gathered by S&P Global Market Intelligence.

Rising rates

UK inflation has hit a 40-year high of 9%, with the Bank of England responding by raising interest rates at every meeting of its rate-setting committee this year. Interest rates stood at 0.1% in December 2021 but now stand at 1.25% after five successive increases. A further rise to 1.75% is expected in 2023, S&P Global Ratings said in a recent report.

The Organization for Economic Co-operation and Development, or OECD, a group of major economies, said there was no guarantee the BoE would be able to quickly bring inflation back to its 2% target. As such, he expects the central bank to raise rates to 2.5% in an attempt to do just that.

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The NII has risen this year as UK banks raise rates for borrowers but not for savers, although a fiercely competitive mortgage market has prevented them from passing on the full impact of rate hikes to mortgage holders.

“For large universal banks like Barclays and Lloyds, the benefit of not suffering from rising deposit interest rates more than offsets the margin headwinds caused by a competitive mortgage market,” said Richard Barnes. , analyst at Ratings.

In the first quarter of 2022, UK banks’ net interest income was up nearly 19% year-on-year, compared to 4.6% for eurozone banks.

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Inflation record

In Europe, inflation hit a record high of 8.1% in the 19 countries that use the euro in May, more than four times the European Central Bank’s 2% target. Inflation, mainly driven by a sharp rise in energy costs, rose to 7.4% in April. The ECB said it would raise interest rates in July by 25 basis points and again in September, to 0%. It has implemented negative rates since 2014 to incentivize banks to lend rather than keep money on deposit at the central bank.

A general 2% increase in interest rates in the UK and Europe would benefit UK and Italian banks the most, according to a recent report by Ratings. French and Dutch banks would see the least positive impact, while Swiss and Swedish banks would be negatively affected due to increased capital requirements.

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