Anyone following UK financial stocks must have wondered what on earth was so awful about the latest trading update from OSB (OSB) that the shares lost almost a third of their value in a single day last week.

The answer is a sudden but we suspect long-overdue admission that higher interest rates aren’t a cure-all for bank profitability, and borrowers are responding much faster than expected to competition in the mortgage market.

In its statement, released after the market closed last Thursday, the ‘challenger’ bank – which own the Kent Reliance, Charter Savings Bank and Precise Mortgage brands – reported it had seen a ‘step change’ in the behaviour of customers at its mortgage business as they reached the end of their initial fixed term.

Rather than suck up higher rates on new loans, it seems owner-occupiers and buy-to-let borrowers are refinancing much earlier  than normal so they spend less time on the higher reversion rate.

As a result, OSB revealed it had to take a significant impairment charge as it adjusted the carrying value of the loan book downward to reflect a lower level of future net interest income.

The bank said it required ‘significant judgement in estimating how long customers will spend on the higher reversion rate in the future’ but it now expected borrowers to spend an average of just five months on the reversion rate meaning it needed to take a first-half charge of £160 million to £180 million for lost income.

At the same time, analysts at Morgan Stanley believe the flight from non-interest-bearing current and instant savings accounts to competitively-priced fixed-term deposits could also take a big chunk out of UK banks’ future earnings.

‘As interest rates overshoot, we believe there is an increasing risk that more deposits than previously anticipated move from non-interest bearing to interest bearing, causing the mix to deteriorate and pushing banks to further reduce the size of their structural hedge.’

Rather than the term deposit mix for what they call the ‘incumbent banks’ increasing from below 10% to over 20% in 2024, the team at Morgan Stanley believe greater competition and higher-for-longer interest rates mean the peak could be over 30%.

‘Our sensitivity analysis points to 10% to 13% earnings risk from a 5% increase in term deposits from non-interest bearing current/instant access accounts,’ they add.

As a result, they have taken a much more cautious stance on the prospects for three of the four big high-street lenders – Barclays (BARC), Lloyds Banking (LLOY) and NatWest (NWG) –
as well as Virgin Money (VMUK).

‹ Previous2023-07-13Next ›