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A couple of months on, in early 2023, the economic mood is less fraught. While there may not exactly be reasons for UK households to be cheerful, and a protracted recession remains possible, there are at least causes to be less pessimistic.

What are they? True, the cost-of-living crisis is still biting many households, especially those on lower incomes. But the fact that economic policymaking is back on an even keel – combined with developments such as the dampening effect of a generally mild European winter on wholesale gas prices – has triggered a marginal improvement in the macro-outlook. 

The prospects have also brightened for lenders, and could now be characterised as cautiously optimistic – with the FY22 results round in February expected to fulfil the generally positive guidance issued in Q3 last year. The principal driver? A better-than-forecast widening of net interest margins, thanks largely to rising base rates combined with the fact that the significant inflows of customer deposits seen during the pandemic have not yet reversed.

That said, lenders are continuing to keep aside appropriate provisions given the continuing volatile conditions. And in an environment of rising interest rates, they will continue to seek out cheap retail funding. This should lead to some innovation and likely pricing changes to attract deposits, as wealthier savers seek better returns.

A further key aspect of the current environment – one affecting households across the income range – is higher mortgage rates. With 1.8 million fixed mortgages set to mature this year, many borrowers will be facing a hike in repayments when they remortgage. While it’s some help that fixed rates have slipped back from their former peak above five per cent, and are now often around four per cent, the shockwaves from the higher repayments will continue to reverberate, impacting consumer spending and confidence.

Against this mixed background, lenders’ strengthening financial position is good news in several ways. As we noted in December, they are actively offering customers advice and support to get them through the tough times and investing in the operational capabilities needed to do this. Their improved results in FY22 will give them greater headroom to allocate the necessary resources and the option to go further and set up for future success beyond the immediate challenges.

What’s more, while the environment for UK households feels less precarious than three months ago, it’s inevitable that turbulence will continue through 2023, possibly including new and different disruptions. If banks are to support their customers effectively through this period, they’ll need data insight, analytics and fact-based decision-making to identify those most at risk and respond proactively to head off problems, rather than reacting with hindsight when customers hit trouble.

As lenders’ finances rebound, they have a host of pressing issues to focus on – including supporting customers through the cost-of-living crisis, repricing deposits, building greater resilience, and enhancing their operations to help customers navigate continued uncertainty. The good news is that their improving financial performance will bring them the wherewithal to rise to all of these challenges.

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