UK banks in ‘eye of the storm’ amid US credit jitters and car finance payouts

UK banks are in the “eye of the storm” as they unveil their latest earnings amid fresh worries about credit stress across the pond and the looming £11 billion car finance compensation scheme.

Investors will be closely watching Barclays when it publishes its third-quarter financial results on Wednesday, followed by Lloyds Banking Group on Thursday and NatWest Group on Friday.

Shares in British banking giants were falling on Friday, weighing on the UK’s FTSE 100 index.

Barclays, which has a big business in the US, was down by more than 6%.

Richard Hunter, head of markets for Interactive Investor, said UK banks were in the “eye of the storm following the US regional bank read-across, ahead of their own third-quarter reporting season which begins next week”.

Investors were on “high alert”, he said, following announcements from two US regional banks that they were dealing with bad and fraudulent loans.

This sent shares in the sector falling sharply and triggered a sell-off across global stock markets amid concerns it could signal wider credit weakness.

Meanwhile, Lloyds is coming under pressure from its exposure to the motor finance market in the UK.

Earlier this week, it told investors it was having to set aside an additional £800 million to cover estimated costs related to the UK regulator’s motor finance compensation scheme – bringing its total provision for the issue to £1.95 billion.

The Financial Conduct Authority has set out proposals for a redress scheme after finding that payouts are due on around 14 million unfair car finance deals.

It calculated that the total bill to the motor finance industry could reach around £11 billion as a result.

Peter Rothwell, head of banking at KPMG UK, said that the “recent turbulence in the motor market means investors will likely ask whether banks’ exposure to this segment requires additional provisioning” considering the plans.

Barclays, which has a smaller share of the market, has made an £80 million provision.

Santander, which reports later in October, previously set aside £295 million for the issue and has not yet moved to update that figure.

“Credit quality remains resilient overall, but close attention will be paid to any pockets that are showing signs of increasing stress,” Mr Rothwell said.

He added that he was expecting the banks to show they can “navigate continued market volatility while sustaining profitability, delivering meaningful progress on their transformation agendas while keeping investors reassured on credit quality and emerging risks”.