Mortgage mis-selling accusations are a ticking time bomb

The big banks are making a killing, almost on the scale of those beastly oil companies last year. Borrowing costs are rising fast, but deposit rates are merely creeping up. The difference is the Net Interest Margin, a key indicator of bank profitability, and that’s going up nicely.

Next week another turn of the Bank Rate screw looks inevitable, especially after the Chancellor effectively gave the green light when he again stressed the urgency of squeezing inflation out of Britain’s struggling economy. Mortgage rates are going up almost every day. They are now approaching 6 per cent for a two-year fix, twice what they cost a year ago.

Yet here’s a thing. Those banks may be making hay, but their owners are not. Shares in Lloyds Banking, easily the UK’s biggest domestic lender, peaked at 53p in February, and have rattled all the way down to 45p now. On the face of it, they look almost absurdly cheap, at a discount to their tangible asset backing, yielding 5.3 per cent and with reserves enough to cover a blizzard of bad debts from defaulting homeowners.

As so often, things are not quite that simple. The property buyers who could just about stretch to a sub-3 per cent mortgage last year, and have no chance of paying 6 per cent when that fix expires, are not likely to hand back the keys and go quietly bust. They are voters, after all, and will try and find reasons why it’s not their fault, following the example of our previous leader.

Why weren’t we told that rates could rise so fast? Why didn’t you recommend a longer fix, even at a slightly higher rate? (Because the renewal fees would come round sooner.) Why did you allow us to place such an albatross around our necks? It may not be long before the word mis-selling creeps back into the lending language.

The politicians know that home-owners are more likely to be Tory voters, and the government will surely see the risk of doing nothing. Besides, nobody likes the banks, and they don’t have votes. What they do have is substantial reserves, built up under pressure from the authorities fighting the last war, determined to avoid another banking crisis.

Government intervention in big markets like this one is never cheap, and seldom pretty. As we saw with Help To Buy, the long-term consequences are usually baleful. But intervention here will be almost impossible for Rishi & Co to resist. Political blood is thicker than banking water. That is why bank shares have fallen so far.

Who knows what Shell shares yield?

Another day, another dividend policy from Shell. For those who have given up trying to keep the score, it looks something like this: Since 1947 the quarterly payment was never reduced, and was gradually increased to 47 cents. For many investors, the payment was the nearest thing to a certainty as anything ever is in equity markets.

Then came the Covid crisis. Bizarre as it may seem now, there was a single day when the price of crude oil actually went negative – they would have paid you to take delivery of the black stuff. We do not know what happened in the Shell boardroom as they watched the cash disappearing, but not knowing what to do, and feeling that they had to do something, they panicked.

Out went the 47c quarterly payment, slashed to just 16c. It did not take many months for the consequences of this self-evidently foolish decision to become clear, even to the board. Perhaps to cover their blushes, the payment was raised, to a daring 16.65c.

Then the oil price took off, fuelled by Putin’s war, so another dividend policy was needed. The payment would rise to 28.75c, and at 4 per cent a year thereafter, which would bring the dividend back up to the 2019 level in, er, 2032.

Fortunately for the shareholders, the key members of the board over this period have been retired to spend more time with their yachts. The new CEO appears to understand that he is running an oil company, perhaps even running it for the benefit of the shareholders.

This week Wael Sawan promised financial focus and forecast a 33c a quarter dividend, growing at 15 per cent a year. Unless there is yet another change in dividend policy, the payout should pass the previous peak within three years. But of course, you can’t be sure of Shell.

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