UK bank shares fall as recession fears grow

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Shares in UK banks fell on Thursday as investors began to bet that the benefits of higher interest rates had peaked and concerns grew about the damage from a potential recession.

UK banks face pressure on their mortgage loan books as customers roll off fixed-rate deals and on to higher rates, at a time when costs elsewhere are also rising.

On Thursday — as the Bank of England stepped up its fight against inflation with a surprise half-point rise in interest rates to 5 per cent, the highest level since 2008 — Barclays shares fell 3 per cent to 147.28 along with falls of 1 per cent at Lloyds Banking Group to 43.16 and almost 1 per cent at NatWest to 233.20p.

So far this year NatWest has seen the largest fall, with shares down 14.5 per cent and a 9 per cent drop in share price over the past 5 days. Shares in Barclays declined 9.5 per cent in the year to date – including almost 4 per cent in the past five days and Lloyds dropped 8 per cent in the year to date and 4 per cent in the past 5 days. 

Analysts said the recent share price falls reflected the market’s expectation of deteriorating credit quality at UK banks as rate rises hit consumer spending — even though banks have said publicly they have so far seen no real signs of stress in their loan portfolios.

“Interest rate expectations are now back up to levels last seen in October and at those rates you have to be concerned about affordability pressures feeding through into the wider economy and credit quality. That’s why investors are increasingly cautious around UK bank shares,” said Edward Firth, banks analyst at KBW.

Rising levels of consumer distress have so far not shown up in deteriorating credit quality at the UK banks but one senior banker on Thursday cautioned that “the pain is in front of us rather than behind us”.

Richard Buxton, UK equity fund manager at Jupiter, said the share price moves reflected “a view that higher rates from here will see squeezed mortgage margins and greater competition for deposits, offsetting the benefits of higher rates”.

Other investors said the share price move was a reaction to comments from shadow chancellor Rachel Reeves, who said the government should force banks to help struggling homeowners with their loan repayments. David Cumming, head of UK equities at Newton Investment Management, said: “Populist anti-bank rhetoric over the longer-term doesn’t help consumers or the economy.”

Last month, CS Venkatakrishnan, chief executive of Barclays, told the Wall Street Journal CEO Council summit that there were no signs of loan distress except around the margins of lending.

However, he did warn that homeowners switching from fixed-rate mortgage deals faced a “huge shock.” He told the conference that between the 1990s and 2020 the average household spent about 20 per cent of its income on mortgage payments, or rent, but with the move to higher rates “that’s going to be about 28 to 30 per cent of their income so there’s an income shock”.

William Chalmers, chief financial officer of Lloyds Banking Group, painted a similar picture in May at an investor presentation as he said that Lloyds’ mortgage book is “very high quality” with an average loan to value of 42 per cent.

“We have seen a small uptick in arrears from the variable rate legacy books from 2006 to 2008 but the rest of the portfolio shows no noticeable movement,” he said.