UK households appear to continue to be withstanding the pressure from higher interest rates with the country’s largest banks all lowering the amount of cash set aside for bad loans.
Barclays, Natwest and Lloyds reported first quarter results last week while HSBC updated investors on Tuesday morning. All four lenders reported lower impairment charges in the first quarter of the year.
Impairment costs are funds banks put aside in case borrowers hit financial distress. They are both backward and forward looking, reflecting existing levels of distress and banks’ own forecasts for how the economy will develop.
They are closely monitored for indications about how household finances are developing.
At Barclays, impairment charges on its domestic bank nearly halved compared to last year, coming at £58m. The bank noted “low delinquencies” in its UK cards business and its “high quality” mortgage portfolio as the main reasons for this fall.
The level of UK cards in arrears of more than 30 days and 90 days remained stable, at 0.9 per cent and 0.2 per cent respectively.
Impairment losses at Natwest fell to £93m from £126m in the same period last year. “Levels of default remain stable and at low levels across the portfolio despite inflationary pressures and the higher interest rate environment,” the lender said.
Lloyds also saw a significant drop in impairments. While this partly reflected an update to its models and partly an improved economic outlook, the bank also reported its loan book remained healthy.
“Asset quality remains strong with credit performance across portfolios stable in the quarter and remaining broadly at, or favourable to pre-pandemic experience,” it said.
HSBC UK reduced its rainy day fund to £52m in the first quarter, down from £161m last year.
The health of UK households has surprised many economists given the predicted impact of higher interest rates.
As inflation took off, the Bank of England hiked interest rates from near zero at the end of 2021 to a post-financial crisis high of 5.25 per cent – a level reached last August.
The main reason arrears and defaults remain low is that unemployment has not increased anywhere near as much as economists expected. Unemployment, which is the main determinant of loan losses, stands at 4.2 per cent.
“Whilst we are comfortable with the strong credit performance of our book, we will continue to assess this position regularly and are closely monitoring the impacts of inflationary pressures on the UK economy and our customers,” Natwest said.