Shares in Lloyds Banking Group PLC (LON:LLOY) and other FTSE 100 lenders slumped back towards recent lows on worries about potential bad debts and a bank windfall tax.
A report emerged that Santander (BME:SAN) UK is preparing for more customer defaults after seeing a pickup in customers falling behind on mortgage and loan payments.
The bad loan provisions could offset increases gains in its net interest margin (NIM), which reflects the difference between what banks charge for loans and pay out for deposits.
Amid higher interest rates, a faltering housing market and increasing cost-of-living pressures, the chief executive of the Spanish-owned lender told the Guardian there has so far been a “very slight increase” in the number of customers falling behind on payments for mortgage, cards, loans and overdrafts.
He said Santander UK had seen a “small uptick” in NIM over the past two quarters.
Since December last the year the Bank of England has raised rates from almost zero to 2.25% at its last monetary policy meeting in September.
As for a ‘back-door windfall’ tax, reports have re-emerged that the Treasury is weighing up options to tap banks for cash, which might include scooping up the interest that the Bank of England pays on the hundred of billions of pounds of deposits it holds from high street banks including Lloyds, NatWest Group PLC (LON:NWG), Barclays PLC (LON:BARC), HSBC Holdings PLC (LON:HSBA), Virgin Money UK PLC (LON:VM), OSB Group PLC (LSE:OSB).
Cash balances held at the Bank of England earn UK base rate, which is set to rise potentially significantly higher, with markets looking for 4.5% by next year, which is a sizable source of net interest income for UK banks.
It accounts for up to 27% of net interest income at NatWest based on a base rate of 2%, according to calculations by analysts at Barclays.
The government ‘windfall tax’ could amount to a £10bn backdoor raid on the sector, according to a report from Bloomberg last month.
It was calculated this could amount to a £1.6bn charge for Lloyds, JP Morgan has calculated, based on the assumption that the policy would target the liquidity coverage banks have to maintain in order to fund cash outflows in a time of crisis.
Such a move would cut the gross net interest income benefit for a bank like Lloyds from around £4.5bn to roughly £2.9bn at a base rate of 3% over the medium term, the JPM analysts said.
Lenders would look to mitigate this in various ways, but the net earnings impact could be into double digits depending on how the policy was structured, they added.
Banks do not typically disclose the balance held at the BOE, but NatWest at £148bn and HSBC at £89bn are estimated to hold the most cash at the BoE, according to calculations by Barclays, followed by Lloyds at £79bn. Virgin Money UK was calculated to have held £10bn and OSB £3bn at the half year stage.
Shares in NatWest were down 2.7% at just after midday on Tuesday, with Barclays losing 2.1%, Virgin 2%, Lloyds 1.8% and OSB 1.9%. More internationally focused HSBC was down just over 1%, while Standard Chartered PLC (LON:STAN) was down 3.2%.
Over the past month, OSB has fallen the most, down 25%, followed by Virgin, down 21%, Barclays 19%, NatWest 17% and Lloyds 11.4%. StanChart is down just over 12% and HSBC 14.6%