British banks are feeling the effects of the gloomy economy

RProvisions for rising loan defaults and a weak housing market pushed profits at the UK’s largest property lender, Lloyds Banking Group, down to year-earlier levels. Pre-tax profit last year was 6.9 billion Pound (7.84 billion euros), as Lloyds announced on Wednesday. In view of high inflation and falling house prices, the money house was not very optimistic for the current year either.

Above all, the weak economy is putting the four largest British financial institutions, in addition to Lloyds, Barclays, HSBC and NatWest, allowing them to benefit less than their European rivals from the rise in interest rates. Regulatory costs, increased loan loss provisions and an uncertain outlook clouded the overall picture. “While higher interest rates have boosted earnings over the past year, the uncertain economic environment — which the rate hike is contributing to — is forcing banks to increase provisions,” said City Index analyst Joshua Warner.

A risk provision of £1.5bn weighed on Lloyds profit. NatWest, in which the UK government is the majority shareholder, also set aside £337m for bad debt. “While we are not yet seeing any significant signs of financial distress from customers, we are fully aware that many individuals and businesses are struggling and concerned about the future,” said Alison Rose, CEO of the bank, when presenting the figures NatWest benefited greatly from the interest rate turnaround, which boosted pre-tax profit by 22 per cent to £5.1 billion.

Like its rival NatWest, HSBC no longer expects interest income to grow significantly this year. Management was targeting “at least $36 billion” for net interest income, but analysts had expected $38 billion. The cautious outlook unsettled investors. HSBC full-year earnings fell as expected in 2022 to $17.5 billion from $18.9 billion in 2021, despite strong interest income. Estimated loan defaults rose more-than-expected to $3.6 billion due to inflation and ongoing turmoil in China’s housing market. Due to the uncertain economic prospects, HSBC also warned of headwinds in the current year.

Barclays benefited from the volatile markets in the bond business, but had to cope with a decline in profits due to a fine in the USA and weak business in investment banking. Pre-tax profit fell to £7 billion in 2022 from £8.2 billion in 2021. The institute also had to absorb £1.2 billion in impairments amid the weakening UK economy. In order to keep the shareholders in line, the money houses rely on dividend payments and share buyback programs.