UK’s Biggest Lenders Write Off £1.76 Billion In Bad Debt
04 Nov 2019
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- UK’s biggest lenders write off loans of £1.76 billion a more than 50% from last year
- Growing bad debt a result of the uncertainty around Brexit situation and slowing global economy
- Banks to take a hit on their revenues because of declining mortgage interest rates in the past five years
The growing rate of writing off loans by Britain's largest banks shows that the economy is already weakening. Between July and September, Lloyds, Barclays, HSBC, and RBS wrote off investments estimated to be around £1.76 billion.
Loan write-offs grew to £176 billion
According to AJ Bell, the writedowns on loans increased by over 50% from £1.17 billion reported last year. The significant increase of around £594 million in writedowns is a result of worsening economic conditions this year. For instance, Thomas Cook collapsed, which is a sign of a deteriorating economic situation. The Brexit situation has aggravated the economic situation in the country, and with a global economic slowdown, it seems the economy is entering into a crisis. In recent times Britain's biggest banks have been grappling with an increasing number of loans that clients aren't able to payoffs. In the third quarter, around 4,355 businesses failed to pay off their loans, according to the Insolvency Service. It is the highest number the Department of Business, Industrial Strategy and Energy have reported in five years.
UK economy already showing signs of weakening
According to Shore Capital analyst Gary Greenwood, the trend is an early sign of a slowing economy triggering problems. It is the corporate companies that are feeling the pinch. Therefore is one company pulls back on \spending, the ripple effects will spread to another corporate. Greenwood stated that the dwindling economy is affecting the weaker players, as evidenced by the current situation. Also Read: Why Are Credit Reports Useful? Bad debt is not the only challenge that Britain’s biggest banks are facing currently. The lenders have indicated that they expect revenues to take a hit because of low mortgage rates that are almost hitting record lows now.
Low mortgage rates could affect the revenue of Banks
A recent study published by Statista indicated that mortgage interest rates in the UK have been falling in the last five years. For instance, in June this year, the two-year fixed rate was around 1.65%t a drop from 2.6% five years ago. Equally, variable interest dropped from 2.71% to approximately 1.99%. Similarly, the ten-year fixed rate has fallen from around 4.06% five years ago to the current 2.63%. Currently, the Bank of England's base interest rate is 0.75%. It has remained relatively below 1% in almost a decade after the Monetary Committee cut it to 0.5% in 2009. The average variable rate was 2.5%, and in 2016, it dropped to its lowest at 0.25%. As a result, banks cannot raise their interest rates on mortgages, which indicates that their revenues will take a hit. In August last year, the cost of borrowing grew to 0.75%, which is the highest since 2009. However, there are still concerns about the state of the UK economy as well as its perspectives. After failing to secure a Brexit deal, Britain is now heading to a third general election within five years. It is leading to uncertainty for the UK economy already weakened by the financial slowdown experienced globally.