The cost of living shock that is rippling throughout household finances is increasing the chances of borrowers defaulting on their debts, Britain’s biggest mortgage lender warned today.
Worsening economic conditions triggered by inflation scaling to 30-year highs is likely to lead to greater financial distress among Brits, Lloyds Bank said today.
The bleak assessment touches on a similar conclusion announced yesterday by the UK’s largest lender, HSBC.
“Additional judgements have been raised to capture the increased risk of inflation and impact on the cost of living,” Lloyds said in its first quarter earnings released, adding it had allocated £100m in loan loss reserves to cope with an expected uptick in defaults.
HSBC also increased loan loss provisions. Barclays and NatWest, who update markets tomorrow and Friday respectively, are also expected to scale up provisions.
Brits are set to be hit by the worst fall in their living standards in 66 years driven by wages failing to keep pace with an annual inflation rate of over seven per cent, according to the Office for Budget Responsibility.
Defaults are anticipated to climb due to households having less capacity to spend money on meeting their debt obligations.
“Whilst we are seeing continued recovery from the coronavirus pandemic, the outlook for the UK economy remains uncertain, particularly with regards to the persistency and impact of higher inflation,” Charlie Nunn, chief executive of Lloyds, said.
Despite the warning, Lloyds updated its forecasts for profits for the year, sending its shares up 2.66 per cent making it among the biggest risers on the FTSE 100 during the morning session.
Earnings before tax dropped 14 per cent for the first three months of the year to £1.6bn, down from £1.9bn.
Post-tax profits came in at £1.2bn.
Lenders have been boosted by the Bank of England hiking interest rates at each of its last three meetings as it scrambles to tame historic high inflation.
The Bank is expected to lift rates again at its next meeting on 5 May.
Banks benefit from higher interest rates as they allow them to charge more for loans and widen their net interest margin, a key source of income for the sector.