Item 1 of 3 New houses under construction are pictured in Aylesbury, Britain August 6, 2020. REUTERS/Matthew Childs
LONDON, Jan 5 (Reuters) – Cuts to British mortgage rates this week are putting forecasts for bank profit margins under a spotlight, adding to pressure on a sector that has struggled to meet shareholder expectations.
But the new year has heralded eye-catching drops in key mortgage rates, prompting some analysts to question whether banks can still meet forecasts for net interest margin (NIM), a closely-watched measure of how much they make from lending.
Analysts at Bank of America (BofA) on Friday cut their earnings estimates for 2024 for UK banks by between 7-12%, citing sharp falls in market interest rate expectations that will pressure banks’ profit margins.
Competition among banks for mortgage business and deposits is ramping up simultaneously, casting a pall over potential returns for bank shareholders, analysts said.
“We have probably reached peak profitability for most UK banks in H1 2023,” Laurie Mayers, Associate Managing Director at Moody’s Investors Service, told Reuters, pointing to assumptions of increased pressure on both mortgage and deposit margins.
Banks have already signalled that the boost to profits from central bank interest rate hikes, which began in 2022 after years of near-zero rates, may be waning.
But lenders are striving to maintain market share and many have been able to offer better rates because they can raise cheaper funding in the wholesale market, said Mike Read, director at broker Prospect Tree Mortgages.
NatWest on Thursday informed brokers of rate reductions to many of its mortgages with effect from Friday, including cuts of 0.42 and 0.3 percentage points respectively on selected 2 and 5 year deals for house buyers.
HIGHER PAYOUTS?
As a result, customer deposits are set to become a more important funding tool, and growing or at least maintaining those deposit bases will be critical to replace the BoE funding.
“The maturity of the pandemic Term Funding Scheme will likely mean banks having to find more expensive sources of funding, including retail deposits, which will in turn likely put pressure on net interest margins,” said Laith Khalaf, head of investment analysis at AJ Bell.
That means banks’ NIM forecasts will be pinched from two directions, particularly if banks pass on lower rates to mortgage customers without being able to pay less to savers, said RBC Capital Markets analyst Benjamin Toms.
HSBC, for example, has boosted the rate it pays out on its online bonus saver account from 3.93% at the start of last year to 4% in January.
“I think it’s likely we will see a further downdraft in NIMs in the next couple of quarters provoked by mortgage margin compression,” said John Cronin, analyst at broker Goodbody.
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Additional reporting by Suban Abdulla; Editing by Alexander Smith
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