Markets are sentiment driven, yet markets in the long run react based on the economic fundamentals. The banks of the United Kingdom are in a similar situation that of the US due to payment defaults on housing loans. In the past decade the prices of houses tripled in the UK and it was a stand alone feat compare to the economic growth. With payments on some 1.4 million mortgages resetting to higher levels this year, 52% up from 2007, banks and mortgage lenders would find it difficult to realize even the principle portion of the loan.
Job loss and salary cuts followed by economic slow down has put home owners of the UK to shift their focus on basic necessities. In the family hedging program, the home owners shelved the idea of repaying their loans. This in turn has adversely affected the banks regardless of size. Royal Bank of Scotland Group PLC, Barclays PLC, Lloyds TSB Group PLC and HBOS PLC all with home mortgage and commercial portfolios may require more reserves against losses. RBS is worst affected by the credit crisis because its US chapter is exposed to the US mortgage market. Smaller lending entities are teetering on the brink of complete collapse.
Many believe, the defaults on the UK mortgage would not be as bad as the US, but if the presentiment of global economic melt down turns out to be real, the banks will not have a smooth sail. As mortgage lending slows and banks competes each other for deposits by offering higher interest rates, profits are bound to dwindle. Sentiments coupled with fundamentals do not augur well for the banking industry of the United Kingdom per se.