Tag: Private Credit

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Bank busting figures as profits pile up!

Banks' profits surge

Banks are reporting unusually strong profits because higher interest rates have widened margins, while slow pass‑through to savers, cost‑cutting, and capital optimisation have amplified returns — even as credit risks begin to rise.

Why profits are so high

The latest figures show that UK banks are still benefiting from the long tail of the interest‑rate cycle.

Even though the Bank of England has not raised rates since August 2023, the base rate remains at 4.5%, allowing lenders to earn significantly more on mortgages and credit than they pay out on deposits.

This margin expansion has been the single biggest driver of profit growth. Research from recently highlighted from Positive Money shows that the UK’s four largest banks have generated £136.8 billion in pre‑tax profits since rate rises began in December 2021, and are on track to exceed their record £45.9 billion made in 2024 by around 14% in 2025.

A second factor is the government’s interest payments on central bank reserves. Because commercial banks are paid the base rate on their risk‑free deposits at the Bank of England, they stand to receive around £30 billion a year in transfers through to 2030 — effectively a public subsidy that boosts earnings without requiring additional lending.

Banks have also been aggressively returning capital to shareholders. Between 2022 and 2024, the big four spent £42 billion on dividends and £32 billion on share buybacks, reinforcing the perception that profits are being harvested rather than reinvested.

How banks are sustaining these profits

The profitability story is not just about rates. Structural shifts are helping banks defend margins even as the rate cycle turns.

1. Slow deposit repricing High Street banks have been reluctant to raise savings rates in line with market levels. As consumers move deposits to specialist lenders offering better returns, the big banks still retain a large, low‑cost funding base.

KPMG reportedly notes that high street banks’ share of deposits has only slipped from 84% in 2019 to 80% in 2024 — still dominant enough to preserve cheap funding.

2. Capital optimisation through securitisation Banks are increasingly using Significant Risk Transfer (SRT) securitisations to free up capital and improve return on equity. Securitised loan volumes have grown at a 4% CAGR between 2022 and 2025, allowing banks to recycle capital into higher‑yielding assets.

3. Cost discipline and digital transformation With margins expected to compress as rates eventually fall, banks are pushing cost‑cutting, automation, and AI‑driven process redesign.

KPMG reportedly forecasts sector‑wide returns on equity could fall from 18% in 2023 to 10% by 2027 without structural change — making efficiency programmes essential to sustaining profitability.

The emerging risk: impairments

Barclays’ latest results show rising credit impairment charges, including an £823 million provision linked to mortgage‑market stress and fraud‑related losses.

This raises the question of whether the credit cycle is turning. If impairments rise across the sector, the profit boom could fade.

The biggest emerging credit risks sit outside the banking system and that is private credit, leveraged borrowers, and liquidity mismatches that could spill back into banks.

Private credit is now large, interconnected, and showing signs of strain. Rising defaults, deteriorating loan quality, and withdrawal caps at major funds point to mounting stress. Defaults could climb sharply, with Morgan Stanley reportedly warning they may reach 8%, far above historical norms.

A second risk is liquidity pressure. Funds are restricting redemptions as investors rush for the exit, exposing the fragility of semi‑liquid structures.

Finally, contagion risk is growing because banks finance private‑credit funds and pipelines. As analysts note, deeper interconnections mean a downturn could transmit stress back into the regulated system.

Conclusion

Banks are reporting strong profits because the rate environment, public transfers, and capital strategies have created a uniquely favourable backdrop.

But the model is fragile: as impairments rise and rates eventually fall, the sector may be approaching the end of its profit‑supercycle.

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Private credit – Banks Say “Contained” — Markets Aren’t So Sure

Private credit concerns

Private credit has become the fault line running beneath the banking system. And it’s now large enough to matter, opaque enough to worry investors, and now visible enough that banks can’t wave it away.

Complicated picture

European lenders spent this earnings season insisting their exposures are “well diversified” or “immaterial”, yet the numbers tell a more complicated story.

Barclays alone reportedly disclosed £15 billion of private‑credit exposure, part of a much larger £66 billion book tied to non‑bank financial intermediaries.

Its hit from the collapse of Market Financial Solutions — a specialist lender undone by alleged fraud — was small in accounting terms, but symbolically important. One cockroach rarely travels alone.

Structural

The deeper issue is structural. Private credit has ballooned into a parallel lending system, lightly regulated and increasingly interconnected with banks through financing lines, securitisations, and business‑development companies.

When these semi‑liquid vehicles face redemption pressure — as several have this year — the stress ricochets back into the banking system. UBS and Deutsche Bank both reportedly emphasised their underwriting standards, but neither disputed that liquidity strains are real.

What unnerves investors is not a wave of defaults — yet — but opacity. Bank of America’s latest survey shows investment‑grade investors are uneasy because they simply cannot see where the risks sit.

Software lending in the U.S., chemicals in Europe, and China‑driven price pressure all add sector‑specific fragility. High‑yield specialists, closer to the coalface, are oddly calmer; they know where the bodies usually fall.

Contained?

The banking system’s official line is that everything is contained. But containment depends on liquidity holding, valuations staying stable, and no further MFS‑style surprises emerging.

Private credit has grown faster than transparency, and faster than the regulatory perimeter. That mismatch — not any single default — is what now shadows the banks.

The issue

The central concern with private credit is simple: it has grown faster than the safeguards designed to contain it.

What was once a niche corner of finance is now a multi‑trillion‑pound shadow banking system whose risks are only partially visible to regulators, banks, or investors. That opacity is now becoming a problem.

Expansion

Private‑credit funds have expanded aggressively by offering speed, flexibility, and looser covenants than traditional banks. In a low‑rate world, that model looked benign. In a high‑rate world, it looks fragile.

Many borrowers were underwritten on assumptions that no longer hold: stable cashflows, cheap refinancing, and buoyant valuations. As rates stay elevated, those assumptions are breaking down.

Defaults

Defaults are rising, and recovery values are uncertain because loans are bespoke, illiquid, and rarely traded.

Liquidity

Liquidity is the second fault line. Private‑credit vehicles promise semi‑liquid access to investors while holding assets that cannot be sold quickly without taking a loss.

When redemptions pick up, funds resort to withdrawal gates, side pockets, or emergency financing lines from banks.

That is where the contagion risk emerges. Banks insist their exposures are modest, but they provide leverage, subscription lines, and warehousing facilities to the very funds now under pressure.

A liquidity squeeze in private credit can therefore boomerang back into the regulated system.

Valuation

Valuation risk is the third issue. Because loans are marked to model rather than market, losses can be slow to surface.

That delays recognition, masks stress, and encourages complacency. When reality finally intrudes — through a default, a refinancing failure, or a forced sale — the adjustment can be abrupt.

The final concern is concentration. Private credit is heavily exposed to software, healthcare, and sponsor‑backed roll‑ups. If one of these sectors turns, the losses will not be isolated.

Private credit is not about to collapse as such. But it is large, opaque, and increasingly interconnected — and that combination is rarely harmless.

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Blue Owl’s Redemption Freeze Sends Shockwaves Through Private Credit

Canary in a coal mine - possible credit crunch warning

Blue Owl’s decision to halt investor withdrawals at one of its flagship retail‑focused private credit vehicles has sent a jolt through a market long celebrated for its resilience.

The move, centred on Blue Owl Capital Corporation II (OBDC II), marks one of the most significant stress signals yet in the rapidly expanding private credit sector.

Redemption

The firm confirmed that investors in OBDC II will no longer be able to redeem shares on a quarterly basis, ending a mechanism that previously allowed withdrawals of up to 5% of net asset value each quarter.

The redemption facility had already been paused in November 2025 as withdrawal requests accelerated, but the permanent halt represents a decisive shift.

To meet liquidity needs and prepare for a partial return of capital, Blue Owl has sold a substantial portion of its loan book.

Reportedly around $600 million of assets were offloaded from OBDC II as part of a wider $1.4 billion sale across three funds, with the firm planning to return 30% of the fund’s value to investors by the end of March.

Reaction

Markets reacted swiftly. Shares in Blue Owl fell between 6% and 10% across recent trading sessions, touching their lowest levels in more than two years.

The sell‑off was fuelled not only by the redemption freeze but also by broader concerns about the firm’s exposure to software‑sector borrowers — an area facing valuation pressure and heightened sensitivity to disruption from artificial intelligence.

The episode has reignited debate about the structural vulnerabilities of private credit, a market now estimated at $1.8 trillion.

The model relies on illiquid loans packaged into vehicles that promise periodic liquidity to investors — a mismatch that works only as long as redemption requests remain manageable.

Blue Owl’s move suggests that, under stress, even well‑established managers may be forced into asset sales or wind‑down scenarios.

Contagion?

Contagion fears quickly spread across the sector. Shares of major alternative‑asset managers, including Apollo, Blackstone and TPG, all declined sharply as investors reassessed liquidity risks in retail‑facing credit products.

For now, Blue Owl insists that capital will continue to be returned through loan repayments and asset sales.

But the permanent closure of redemptions at OBDC II stands as a stark reminder: the private credit boom is entering a more volatile phase, and liquidity — once taken for granted — is becoming the industry’s most fragile commodity.