Sunday January 15, 2023 12:58 pm
UK banks are better prepared to withstand a jump in home loan defaults, allaying fears of a repeat of the financial crisis, analysts have said. AM city
Strict affordability rules put in place after the 2008 banking crash have strengthened lenders’ lending books, meaning they are well protected from a possible spike in defaults caused by last year’s hike in mortgage rates.
“While it’s tempting to look back at the great financial crisis, comparisons between now and 2008 could reveal as many differences as similarities,” said Russ Mold, chief investment officer at AJ Bell.
Routine assessments of the sector by the Bank of England (BoE), known as ‘stress tests’, and requirements to hold more cash in reserve to deal with an increase in loans that go unpaid or a Northern Rock-style bank run has bolstered the balance sheets of companies like Barclays, Lloyds and NatWest.
The average ratio of capital to risky assets increased from 4.5 percent to 14.3 percent, according to BoE data.
Sophie Lund-Yates, a senior equity analyst at Hargreaves Lansdown, said: “Most UK banks are sitting on piles of excess capital.”
That dry powder may prove worthwhile if mortgagors default on their debts as rates doubled in the past year, according to Moneyfacts, and higher costs of living eroded their budgets.
However, outstanding debt is starting to look a bit shaky.
Some 750,000 people are at risk of defaulting on their home loans, according to the city’s watchdog, the Financial Conduct Authority, raising concerns that banks’ results could be hit over the next year.
Greater debt fragility may sour investor sentiment toward big bank stocks.
Major UK lenders will start posting their full-year 2022 earnings early next month.
Although they are expected to get a hefty boost from higher interest rates that allow them to charge more for loans, there is a risk that investors will dump their shares if they sound the alarm about higher mortgage defaults.
Experts also don’t believe that negative equity levels, when the value of a borrower’s defaulted debt exceeds the price of their property, are heading to the level rates reached during the financial crisis due to rules established over the past decade plus or less.
AM city has reached out to major UK banks for comment.