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© Reuters. Lloyds to benefit less than HSBC, NatWest as mortgage market pressures ease - broker
Proactive Investors - Expected easing in the current pressure on UK bank profit margins towards the end of the year should benefit the likes of HSBC (LON:HSBA), NatWest (LON:NWG) and Virgin Money (LON:VMUK) more than Lloyds Banking (LON:LLOY).
That is the view of analysts at RBC Capital Markets, who calculate that the headwinds on net interest margins – the difference between the amount a bank earns on its loans and pays out on its deposits – are going to subside by the end of 2023 and turn into a “small tailwind” in 2024.
Residential mortgage spreads – the difference between mortgage and swap rates – are currently “in focus” as the spread on new mortgages is currently lower than the average spread of the mortgage book as a whole and below the spread of mortgages that are about to mature.
“The latter dynamic is creating pressure on banking net interest margins,” the analysts said, with rolling off mortgage spreading increasing during 2022 but seen falling “from here” before increasing again at a lower level in the third quarter of 2024 as higher-spread five-year fixed mortgages written in 2020 start to roll off.
All UK banks should benefit from mortgage spread compression fading this year, the analysts said, with some benefitting more.
In theory, this should be more acute for those that have a larger proportion of mortgages on their loan books, they added, pointing to Santander (BME:SAN) UK and Virging Money.
Also benefitting more should be those banks that were lending significantly above their stock mortgage market share during 2020, a period of significantly wide spreads, which they said would be HSBC UK and NatWest.
Going into 2024, the analysts see growth of ‘structural hedge’ income as the driving force of income, referring to the interest rate hedge that banks take to reduce the impact of the volatility of short-term interest rate movements on their balance sheet.
The calculations suggest that Barclays PLC (LON:BARC) will be the biggest beneficiary of structural hedge tailwinds.
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