Bumper profits come as other sectors do not seem to be reaping the same benefits
UK banks have so far reported bumper profit rises in the third quarter, which they say reflects improving economic forecasts.
Other sectors do not seem to be reaping the same benefits, particularly in light of the uncertainty linked to the Covid crisis.
We take a closer look at why lenders are performing so well.
Which UK banks have reported increased profits so far?
HSBC and Barclays beat analysts’ expectations with strong profits for the three months to the end of September. HSBC posted a 74% rise, to $5.4bn while Barclays almost doubled its profits to £2bn.
Barclays benefited from a surge in trading and deal-making at its investment banking arm but, like HSBC, largely has improving economic forecasts to thank for the better-than-expected results.
How are improving economic forecasts boosting bank profits?
Accounting rules rolled out in the wake of the 2008 financial crisis require banks to assess the likelihood that customers will default on their loans, and put aside cash to cover those potential losses.
As a result, billions of pounds were set aside in 2020 amid fears that Covid would spark a global recession and a wave of defaults. However, the rollout of the vaccine programme, particularly in the UK, has lifted economic forecasts and allowed banks to release a portion of that cash.
Lenders are also benefiting from weak comparative figures in 2020, when profits were also hit by declines in revenues as customers reduced spending and increased savings during lockdown.
In other words, it is easier to double profits if they halved a year earlier.
Are there any other factors at play?
Banks such as Lloyds and NatWest that focus primarily on the UK market are likely to benefit from strong mortgage lending.
The housing market has boomed, in part down to people reconsidering their lifestyles during the pandemic. That trend has continued despite the end of the stamp duty holiday.
Lloyds and NatWest will report their third-quarter earnings on Thursday and Friday respectively.
Why is the chancellor considering cutting taxes for banks, despite their growing profits?
Rishi Sunak is reportedly preparing to chop the bank surcharge from 8% to only 3% from April 2023 to offset the rise in corporation tax from 19% to 25% scheduled for the same year.
It would mean that the overall tax rate for banks would rise from 27% to 28% rather than the 33% the Treasury has warned “would make the UK taxation of banks uncompetitive and damage one of the UK’s key exports”.
Are bankers in line for bigger bonuses?
They will have to wait until the spring to find out the size of their bonus packages for 2021. However, Barclays revealed this summer that it had increased the size of its bonus pool by 45%, with top bankers in line for a combined payout of more than £1bn for the first half of 2021 alone.
NatWest is the only major bank to have cut its bonus pool, having slashed its half-year pot by 20% to £142m.
Source: The Guardian