9th May 2022 14:38
(Alliance News) - UK high street lenders saw net income surge in the first quarter of 2022, benefiting from rising central bank interest rates, but Berenberg has cautioned against run-away optimism.
"UK banks' net interest income exceeded consensus during the first quarter of 2022, by 2% on average. Net interest margin guidance, for banks that provide this, also increased. However, concerns about mortgage pricing concerns continue to cast a cloud over this strong outlook and have been bolstered by new concerns related to deposit pricing," Berenberg explained.
At the end of April, Barclays reported a 10% rise in income - growing to GBP6.50 billion from GBP5.90 billion, with net interest income surging 26% to GBP2.34 billion from GBP1.85 billion.
NatWest - formerly Royal Bank of Scotland - saw total income rise 17% to GBP3.03 billion from GBP2.59 billion. Net interest income rose to GBP2.05 billion from GBP1.86 billion.
Lloyds net income rose to GBP4.11 billion from GBP3.66 billion. Underlying net interest income increased to GBP2.95 billion from GBP2.68 billion.
HSBC's total revenue in the first quarter dropped 4.1% to USD12.46 billion from USD12.99 billion. Net interest income, however, improved to USD7.00 billion from USD6.51 billion.
All four high street banks saw their banking net interest margin improve in the first quarter compared to the year before. Coupled with the rising margins, the banks also enjoyed growth in customer deposits - which Berenberg said will offer cover for increased competition and mortgage pricing.
"The benefit of higher interest rates to banks relies, in part, on deposit rates rising proportionately less. Deposit repricing in the first quarter of 2022 was minimal. But NatWest's suggestion that 40% of the latest Bank of England rate hike was passed on to depositors caused unnecessary alarm, in our view," Berenberg continued.
"Specifically, the the 10 basis point increase in NatWest's deposit rates should be viewed in the context of 90bp of BoE rate hikes since December 2021. Therefore, inferences that UK rate hike benefits during 2022 will be materially diminished by deposit repricing are too severe, in our view. This is consistent with recent comments by Lloyds' Chief Financial Officer William Chalmers, who suggested that deposit pass through is less than 40%, but more than 15%."
Berenberg also noted the profitability of bank deposits is higher "than at most points" in the recent past.
"For instance, the aggregate rate paid on new UK time deposits during March 2022 was 76bp - up 50bp year on year. These deposits can, however, now be invested in government bonds at much higher yields than a year earlier. For instance, two year Gilt yields have risen by about 150bp during the past year. The resulting improvement in deposit profitability more than offsets the mortgage margin headwind, in our view," the German investment bank added.
Berenberg was quick to point out that large banks typically make more of their deposit funding from rate-insensitive current accounts, rather than savings accounts.
"Aside from the direct benefits of lower funding costs, this creates indirect advantages as interest rates rise. Specifically, we expect smaller banks' ability to compete for UK mortgage growth to fall as interest rates rise, since these banks' funding costs will rise more than larger peers," Berenberg added.
This should also "alleviate" mortgage margin pressure.
Berenberg's revenue outlook for UK banks is 2% ahead of market consensus for 2022 and 1% ahead of consensus for 2023, and has claimed NatWest as its 'top pick' in the sector.
By Paul McGowan; [email protected]
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