British banks reported higher first-quarter net interest income, driven by higher interest rates, but rising inflation is set to impact revenues in the coming months.
Barclays PLC, NatWest Group PLC, Lloyds Banking Group PLC and HSBC Holdings PLC all generated more net interest income, or NII — revenues on interest-bearing assets minus expenses on interest-bearing liabilities — than in the first quarter of 2021.
The Bank of England has increased the base rate at successive meetings, and it now stands at 1%. Banks can generate more NII by passing on higher rates to borrowers.
Higher central bank rates and sustained mortgage lending have boosted U.K. bank earnings, but inflation is likely to affect revenues and asset quality in future quarters, rating agency DBRS Morningstar said in a May 11 note to investors.
Robust US spending
Barclays generated higher NII due to positive trends in the U.K. as well as robust U.S. consumer spending and payment volumes. But the bank's performance was affected by one-off conduct costs. It will have to repay investors about £500 million after it mistakenly issued an extra $15 billion of financial products without proper authorization.
HSBC is the other leading U.K. bank with extensive operations overseas; it was affected by continued COVID-19 lockdowns in China, along with concerns regarding China's commercial real estate market and the knock-on effects on trade of Russia's invasion of Ukraine.
HSBC's net interest income totaled £5.22 billion, up from £4.72 billion a year ago, but net income decreased to £2.45 billion from £3.15 billion, with higher-than-expected credit losses and lower noninterest income more than offsetting the positive impact of higher interest rates.
On aggregate, these banks reported lower attributable profit, partly due to a higher level of loan loss provisions compared with 2021, when banks benefited from significant provision releases due to better-than-expected macroeconomic conditions, according to DBRS.
Repayment struggle
Lloyds, Britain's biggest mortgage provider, added £100 million of provisions in the first quarter, reflecting potential affordability risks for its customers in the wake of rising inflation. It is contacting customers it feels are likely to struggle with repayments in the near future. NII was markedly higher, but net income declined to £1.18 billion from £1.38 billion.
NatWest is also contacting customers it thinks might require financial support amid rising living costs. It posted a slightly higher NII and an increase in net income in the first quarter.
