UK banks’ shares slide on fears of recession and bad debt

UK banks’ share prices dipped on Thursday as increasing fears of recession, bad debt and a fairly poor set of US bank earnings this week spooked investors.

Barclays shed 2.8 per cent, HSBC 0.6 per cent and Standard Chartered 0.8 per cent. Domestic-focused lenders Lloyds and Natwest also traded lower, finishing down 1.0 per cent and 2.2 per cent respectively. 

The big banks have had a strong start to 2023, with all of them making strong gains in 2023’s optimistic atmosphere. Barclays, HSBC, Natwest and Standard Chartered are all up over 10 per cent from the start of the year. 

But it appears investors may be starting to get a bit nervous.

“Caution is returning to the banking sector with Barclays leading the industry charge downwards, as worries whip up about loans turning bad and recession fears stalk the global economy,” Hargreaves Lansdown’s Susannah Streeter said.

While rising interest rates brought banks bumper profits last year, the increased cost of borrowing has started to put pressure on borrowers, with both consumers and businesses feeling the squeeze. 

“Although in the last quarter of the year default rates only increased for small and medium-sized businesses, they are forecast to rise for larger businesses too in the first few months of 2023. Sharply rising interest rates are clearly taking their toll and its adding to nervousness about taking on too much debt,” Streeter said. 

A rise in unsecured lending defaults at the back end of 2022 also suggests struggling firms and households are increasingly a risk for lenders. 

Streeter continued: “This snapshot paints a picture of increased wariness about the escalating costs of borrowing, and shows increasing vulnerability for companies who took on large loans during the cheap money era and now are facing high costs when renewing terms.”

Investors may also have had half an eye on US bank earnings, which finished yesterday. 

Profit fell 20 per cent across the six major US lenders. This was not unexpected, as analysts had been anticipating that profit would fall in the new year as fears of recession grow. 

US banks built up a considerable cushion in the last quarter as banks continued to prepare for an increase in defaults. A total of $6.1bn was set aside in the last quarter by US banks, suggesting the banks are taking no chances when it comes to bad debt.