UK Building Societies: NII Growth Slowing Down; Some Asset Quality Deterioration but from Very Low Levels

DBRS Morningstar has released a commentary discussing the five mid-size UK Building Societies’ (Coventry, Yorkshire, Skipton, Leeds and Principality) H1 2023 earnings.

Key highlights:

• The five mid-size Building Societies showed good results in the first half of 2023 supported by strong net interest income growth benefitting from the rapid increase of Bank of England’s base rate since end-2021, however, an increase in the Societies’ funding costs has started to pressure net interest income.

• In the last twelve months asset quality showed signs of deterioration under the increasingly challenging economic environment of high inflation and higher interest rates, a trend that we expect to continue.

• RMBS and Covered Bonds have gained momentum as Building Societies continue to reduce their dependence on Bank of England funding schemes.

“We expect most Societies will continue to feel the pressure to pay more on deposits in the coming quarters, as their members are likely to increasingly expect higher yields on deposits,” notes Maria Rivas, Senior Vice President, Global FIG at DBRS Morningstar. “Moreover, we expect asset quality metrics will show some weakness in coming months although from very low levels given that the vast majority of the Societies lending is concentrated in residential mortgages that tend to perform better than corporate loans in an economic downturn.”