Fear stalks the banking sector – but should it?

After the recent turmoil in the markets, the only thing shareholders in UK banks are feeling is fear. But don't write off the whole sector, says Eoin Gleeson.

The UK's five top banks reported record profits last week, churning out combined profits of £21bn for the first half of the year. But it didn't do much to raise the spirits of investors. After the recent turmoil in global markets, the only thing that shareholders in UK banks are feeling is fear. The prospect of a financial forest fire spreading to the UK, stoked by the crisis in US subprime mortgages, has soured any optimism about the sector.

The banks can take a lot of the blame for the underwhelming response to their bumper earnings reports. They haven't done themselves any favours over the last few years buying up tranches of debt backed by dodgy subprime mortgages, funding massively leveraged buyouts across every sector and handing out money on the high street to anyone passing. British consumers have built up a £1.3trn mountain of debt in the process and they can expect to feel the full brunt of the recent interest-rate rises as the fixed-income mortgages they took out with banks come to an end in the near future. In the next ten months, £155bn of fixed-rate mortgages will re-price, with the average increase in monthly interest payments peaking at close to 40% by autumn, says Citigroup.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Eoin came to MoneyWeek in 2006 having graduated with a MLitt in economics from Trinity College, Dublin. He taught economic history for two years at Trinity, while researching a thesis on how herd behaviour destroys financial markets.