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British banks set to score from sharply rising rates as European peers lag

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British banks set to score from sharply rising rates as European peers lag

British banks are poised to benefit from rising interest rates, with revenues generated from loans set to increase more sharply than those of European peers over the remainder of 2022.

Net interest income, or NII, at U.K. banks with assets of more than £100 billion is forecast to increase by 16.3% year over year in 2022, compared with 1.8% at similarly sized European banks, according to analyst estimates collected by S&P Global Market Intelligence.

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Rates rising

U.K. inflation has reached a 40-year high of 9%, with the Bank of England reacting by increasing interest rates at every meeting of its rate-setting committee this year. Interest rates stood at 0.1% in December 2021 but now stand at 1.25% after five successive rises. A further rise to 1.75% is expected in 2023, S&P Global Ratings said in a recent report.

SNL Image* Access consolidated statistics on U.K. banks on CapIQPro.
* Access rates and yields data on CapIQPro.

The Organisation for Economic Co-operation and Development, or OECD, a group of leading economies, said there was no guarantee the BoE would be able to get inflation back to its 2% target quickly. As such, it expects the central bank to raise rates to 2.5% in an attempt to do so.

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NII has increased this year as U.K. banks raise rates for borrowers but not for savers, even though a highly competitive mortgage market meant they refrained from passing on the full impact of rate rises to mortgage holders.

"For the big universal banks like Barclays and Lloyds, the benefit of not passing through the rise in interest rates on deposits more than offsets the headwinds to margins caused by a competitive mortgage market," said Richard Barnes, an analyst at Ratings.

In the first quarter of 2022, net interest income at U.K. banks grew by nearly 19% year over year, compared with 4.6% at eurozone banks.

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Inflation record

In Europe, inflation rose to a record high of 8.1% across the 19 countries that use the euro in May, more than four times the European Central Bank's 2% target. Inflation, mainly driven by a sharp rise in energy costs, had risen from 7.4% in April. The ECB has said it would raise interest rates in July by 25 basis points and again in September, to reach 0%. It has implemented negative rates since 2014 to encourage banks to lend rather than keep money on deposit at the central bank.

A blanket 2% increase in interest rates in the U.K. and Europe would see British and Italian banks benefit most, according to a recent report from Ratings. French and Dutch banks would see the least positive impact, while Swiss and Swedish banks would be negatively affected because of increased capital requirements.

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