UK banks brace for interest income slowdown amidst falling rates

March 04, 2024 (MLN): The net interest income (NII) of majority banks in the UK is expected to moderate from the highs in 2023 based on increased deposit costs, tight margins on mortgage loans and falling interest rates, although income from structural hedge maturities will gradually help support NII, says Fitch Ratings.

The major UK banks reported strong underlying profitability in their 2023 results, as higher interest rates boosted NII, loan impairment charges were contained and costs only grew moderately

Asset quality has been resilient despite materially higher interest rates and weak macroeconomic conditions.

Average impaired loan ratios were unchanged across the major UK lenders (end-2023: 2.0%), but we expect these to deteriorate in 2024 as higher interest rates reduce borrowers’ repayment capacities.

Fitch expects CET1 ratios to remain solid as strong profits mostly offset further capital returns and risk-weighted assets growth.

Deposit migration to term and savings deposits should slow in 1H24, following peaking interest rates. Liquidity is likely to remain strong and of high quality.

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