THE steady rise in interest rates in the last year and a half has largely been good news for major banks, which have enjoyed a boost to income and profits by being able to achieve higher margins from loans and mortgages.

But the banks are not having it all their own way amid the challenging economic climate.

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Results published in recent days by NatWest Group, owner of Royal Bank of Scotland, and Lloyds Banking Group, which owns Bank of Scotland, signalled that while there has been a boost to income from higher interest rates, there have been falls in deposits, amid signs depositors are shopping around for better deals for savings in a higher interest rate environment.

The first-quarter results of both NatWest and Lloyds were better than the market expected and were followed today by forecasting-beating results at Virgin Money, owner of the former Clydesdale Bank, for its first half.  

Virgin reported a rise in customer deposits, by three per cent to £67 billion, for the first six months of the year. However, its results laid bare the challenges people are facing in an economy bedevilled by high interest rates and inflation, as the bank reported a sharp rise in impairment losses in the six months to March 31 – to £144 million from £21m in the corresponding period last year – and signalled its expectation of a further rise in arrears.

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Chief executive David Duffy said that the increase in impairment losses was “primarily driven by updated economic assumptions as underlying credit quality generally remained stable, albeit with some signs of a modest increase in arrears from cards, from abnormally low pandemic levels”.

Virgin did raise its guidance on net interest margins for the full year, suggesting it continues to see further benefit from the current high interest rates. But it also said it anticipates a continued rise in arrears, which might explain why the bank’s share price fell sharply today.