Bankers’ optimism is waning as war ensues on Covid’s heels

British banks, which took 2021’s big profits as a sign of better things in the future, will prepare for disappointment this week.

With the Covid pandemic waning, 2022 was intended to mark the slow return to normalcy: a recovery in international travel, economic growth and interest rates from record lows. Barclays’ former boss Jes Staley was particularly optimistic last year, saying “huge accumulated demand” would lead to a robust economic recovery that would “implement into 2022”.

But Russia’s invasion of Ukraine has rattled global markets and jeopardized energy supplies – exacerbating already rising costs for consumers and businesses and resulting in weaker prospects for bank earnings.

Britain’s cost of living crisis has erupted just months after the government shut down Covid subsidy schemes, which not only kept businesses and workers afloat, but by extension helped banks avoid the increase in defaults feared at the start of the pandemic.

But the broader effects of rising inflation and geopolitical tensions are being felt around the world, with JP Morgan’s boss, Jamie Dimon, warning last week that a recession was “absolutely” possible.

That means the same banks that released billions of pounds in loan losses last year, believing the worst was over, will have to start pulling the money back as borrowers fall into hard times. It will dampen earnings growth and forecasts for the UK’s four major lenders – Lloyds, NatWest, HSBC and Barclays – all of which are due to report first-quarter results over the coming week.

For example, Barclays is expected to set aside £ 299m for potential defaults, up from £ 55m a year earlier when Staley predicted an economic boom. It is likely to contribute to a potential 45% drop in profits to £ 1.3bn. according to average analyst estimates.

Similarly, HSBC is likely to set aside DKK 934 million. USD (715 million) to protect against potential defaults in the first quarter, compared to the 435 million. USD, which it released in early 2021. It will play a role in reducing HSBC’s pre-tax profits by more than a third to $ 3.7 billion. according to consensus estimates.

The profits of Barclays and HSBC will also be affected by the end of the investment banking boom as fewer companies raise money in the financial markets and hold back from mergers and acquisitions. The ripple effects of Russia’s invasion of Ukraine have generally made companies more cautious about launching deals or fundraising.

British banks’ Wall Street counterparts have already felt the blow, and first-quarter profits have almost halved at JP Morgan, Goldman Sachs, Morgan Stanley and Citi.

But Britain’s domestic-focused lenders – including Lloyds and NatWest – will also feel the pinch. With customers more likely to default, banks have tightened their lending criteria, meaning lower income from otherwise lucrative loans. Particular emphasis will be placed on the outlook for mortgages after it emerged this month that banks began to take the cost of living crisis – including higher energy and grocery bills as well as the increase in social security – into account when calculating how much to offer borrowers.

Meanwhile, banks that have benefited from rising UK house prices, which increased demand for larger home loans, will be aware that the cost-of-living crisis is also likely to dampen house price growth in the coming year.

It will hurt domestic lenders like Lloyds, which owns Halifax – the country’s largest mortgage lender, which is considered a bellwether for the UK economy. Analyst forecasts published this month suggest that Lloyds’ pre-tax profit could fall by 25% to $ 1.4 billion. GBP, while NatWest is estimated to see its own profits fall 20% to £ 755 million.

Leave a Comment