K banks are set to reveal another set of strong profits, but the cracks could be forming as higher borrowing costs and pressure to raise savings rates takes a toll.
Lloyds Banking Group, Barclays and NatWest Group will kick of bank earnings season with their half-year financial results.
The British banking giants beat expectations in their first quarter with profits bolstered by a rise in UK interest rates, which currently stand at 5%.
Profits are expected to stay high over the second quarter as the lenders continue to benefit from it being more expensive to borrow.
But investors will be watching closely for signs that banks have begun to feel the impact of pressure on borrowers and customers hit by a cost-of-living squeeze, experts said.
We expect UK banks to face some challenges over 2023 and 2024, primarily from the quality of their loan books, but we think the sector is entering this period of slow-burn stress from a relatively good position
Gary Greenwood, a research analyst for Shore Capital Markets, said the high-street banks could see an increase in arrears in the latest quarter as more people struggle with higher repayments.
Barclays is predicted to have put aside nearly £600 million in the latest quarter in credit impairment charges – meaning money put aside to cover expected losses from bad debt.
Lloyds is looking at a £371 million impairment charge, and NatWest is set to put by £269 million, both a big jump on the previous quarter, according to consensus estimates.
Edward Allenby, an economist for Oxford Economics, said rising interest rates and the growing risk of recession are likely to cause a “deterioration in the quality of loans held by banks”.
Lenders could also see the amount of cash held in bank accounts and deposits shrink in the latest period.
This is as people use savings to pay down debt or to make up for a shortfall in income, thanks to higher living costs, Mr Greenwood suggested.
Furthermore, British banks have been under fire from MPs in recent months for not raising savings rate in line with the Bank of England’s base rate, while mortgage rates have spiked.
This pressure to pass on rate rises to savers could mean lenders see a smaller increase in income.
However, banks remain in “healthy shape” despite the pressures, which is set to be reflected in their half-year profits.
Mr Allenby said: “We expect UK banks to face some challenges over 2023 and 2024, primarily from the quality of their loan books, but we think the sector is entering this period of slow-burn stress from a relatively good position.”
Mr Greenwood added that the mainstream lenders could be “a little more cautious” in their outlook.
Lloyds is expected to report a pre-tax profit of nearly £4 billion in half year to July, which would be up from £3.7 billion the prior year.
Meanwhile, Barclays’ profits are set to hit £1.9 billion in the latest quarter, while NatWest’s quarterly profit is estimated to be £1.5 billion, according to analysts’ consensus.