A rate cut could wipe £1.4bn off operating profits at the UK's top banks

Jake Cordell and Tracey Boles
Financial Workers Put In The Hours As Days Shorten
Rate cut could lead to banks losing around 10 per cent of last year’s earnings (Source: Getty)

​Profits will be decimated at the UK’s top banks if, as widely expected, the Bank of England cuts interest rates to a historic low of 0.25 per cent today.

New analysis by the banking practice of consultants Simon-Kucher and Partners predicts that lower rates would wipe £1.4bn off the operating profits at the UK’s top 21 retail bank lenders and building societies, equivalent to around 10 per cent of last year’s earnings.

“We would expect a squeeze on banks’ profits from a much larger drop in rates on lending amid limited scope for reducing rates on savings,” the report said.

The “huge hit” could well force the banks to lower dividends, it added.

City analysts also warn that lower rates would heap pressure on a banking sector already experiencing a downturn in profitability and licking its wounds from years of fines, litigation fees and tough capital requirements.

Read more: An interest rate cut is almost inevitable: It's a shame it won't work

“For almost all banks, a base rate cut together with an expectation of lower for much longer rates is singularly bad news,” said Ian Gordon, banking analyst at Investec.

He added that banks might be able to contain the fallout from rates decreasing to 0.25 per cent, but any cut further would place significant pressure on the UK’s biggest lenders.

“With the prospect of even lower interest rates, it will only increase the pressure on banks to embrace new operating models,” said PwC head of UK banking Isabelle Jenkins.

Read more: These experts say the BoE should 'throw the kitchen sink' at the UK economy

HSBC said yesterday it was scrapping its short-term plan to deliver a 10 per cent return on equity for shareholders as a result of its “projections for an extended period of low interest rates”.

Barclays boss Jes Staley said last week a cut to 0.25 per cent wouldn’t “have much of an impact us [but] going down to zero would”. The Royal Bank of Scotland (RBS) has told 1.3m of its business customers that it may have to charge them to hold deposits if rates go into negative territory.

Governor Mark Carney has previously signalled he is aware of the pressure that low rates places on bank profitability and signalled he would be watching it closely given his dual remit of securing financial stability and achieving the medium-term inflation target.

Read more: City braced for rate cut as building data and bank woes unsettle markets

Market speculation after the referendum result suggested any lower interest rates could be accompanied by a new funding for lending scheme to offer banks cheap loans to ensure lending does not dry up.

Non-traditional lenders welcomed the prospect of a rate cut yesterday.

“I’m excited by a drop in rates,” said Graham Wellesley founder of peer-to-peer lender Wellesley and Co. “You have this dichotomy between commercial lending institutions and the alternative finance market. A drop in interest rates makes our products more attractive.”

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