Interest Rate Rises And The Quest For The “New Normal”
21st July 2015
I find it interesting that things seem to be going almost full circle in the banking sector, almost back to how it was when I first started in 1990. With the re-appearance of TSB (“the bank that likes to say yes”), we could also see the resurgence of another an old brand on the high street with the return of “the listening bank” as HSBC looks to a possible exit from the UK. Interestingly enough, we do appear to have seen a noticeable increase in clients with HSBC personal guarantees which would seem to suggest they may potentially be clearing their balance sheet in preparation for an exit (but I must stress the evidence is purely anecdotal at this stage).
Interest rates will eventually go up – it’s inevitable, and the impact on the banking sector and those individuals and companies who are living on a financial knife-edge could be quite profound. With Mark Carney ditching his “forward guidance” almost as quickly as it was introduced, it seems that you would need to be almost psychic to accurately guess when interest rates will go up. With the Greece issue seemingly resolved for now at least (although not if you believe the IMF) and steady growth in GDP, most people are expecting a rate rise in either Q4 2015 or Q1 2016 (however, we’ve been down this road before and there is still of course the China question which could render the whole topic moot).
Looking at the 2014 results for Barclays and Lloyds Banking Group, it would appear that “risky” loans to individuals and companies (“risky” defined as wither at serious risk of default or already in default) amount to a staggering £5.7bn. As at 31st December 2014, Lloyds non-performing secured loans total £3.9bn and mortgages that are greater than 3 months in arrears (excluding repossessions) are at £6.3bn. Barclays have even had to provision something like £1.25bn due to litigation and investigations relation to the FX scandal. Whilst I believe that generally speaking, the banks’ own balance sheets are in far better shape than they were a few years ago, the impact of a 25 basis point rise in base rates could have a profound impact on their struggling personal customers. With many households already using payday loans and/or credit cards to meet their monthly obligations, any increase in mortgage payments could be the proverbial straw that broke the camel’s back.
I don’t believe we’ll see anything like the carnage we did in the mid 90’s as I can’t see interest rates getting back to 16% anytime soon, if ever again. I believe bigger companies have used this unprecedented period of low interest rates to pay down their debts and re-capitalise their balance sheets. Where does this leave the debt advisory and insolvency market? My feeling is that when interest rates do start moving, it will be private individuals, micro-businesses and SME’s that will be hit hardest.
Our advice is that if you are worried about how a rise in interest rates will affect you, the time to start getting some advice is now. Historically, interest rates have usually hovered about the 5% mark, but the general consensus seems to be that the “new normal” will be in the 2.5 to 3% range.
I am reminded of the ancient Chinese curse: “May you live in interesting times”. Yes, they are interesting indeed!
Please be advised that all views expressed in these posts are those of the author and not of James Rosa Associates ltd.