UK banks to post first results since interest rate cut
Major UK banks are to reveal whether borrowers are benefiting from lower interest rates as they report third-quarter results over the next two weeks.
Lloyds Banking Group will be the first to report on Wednesday, followed by Barclays and Natwest on Thursday and Friday, respectively.
HSBC will post its earnings on 29 October the following week. Standard Chartered and Santander will round off the reporting period on 30 October.
Net interest income (NII)—the difference between what banks pay on deposits and earn from loans and other assets—boomed after the Bank of England started hiking interest rates at the end of 2021, and lenders raised rates for savers more slowly than for borrowers.
However, banks’ margins have come under pressure this year as markets have priced interest rate cuts by the central bank. It cut rates at the start of August for the first time in more than four years.
Peter Rothwell, head of banking at KPMG UK, told CityAM that NII among the UK’s major banks had risen by around a third over the last four years.
“All eyes will be on the outlook for net interest income and margin,” he said.
“It will be interesting to see the extent to which competition in lending continues to impact margins and whether this is being offset by reductions in deposit rates as the BoE has increasingly more room to move on rates.”
Money markets are pricing in at least one more interest rate cut before the end of this year.
“In the UK, lending activity has been showing some tentative signs of improvement – particularly UK mortgage approvals for house purchases – albeit from a low base, reflecting the fact that interest rates have now peaked,” Gary Greenwood, an analyst at Shore Capital, said in a note.
“However, Budget uncertainty has cast something of a shadow over the UK economy, and this may have led some borrowers to pause for breath.”
The BoE’s latest credit conditions survey pointed to broadly unchanged lending demand for house purchases, unsecured and corporates in the third quarter. Greenwood expected “activity to pick up again” once Budget uncertainty has been lifted.
“In an environment where economic activity is still subdued and interest rates are on the turn, it is imperative to retain a strong control on costs,” Greenwood said.
Lloyds
As Britain’s largest mortgage lender, Lloyds is considered a bellwether for the UK economy. Its lending income and loan loss provisions will be closely watched for signs of the financial health of British consumers and businesses.
According to a company-compiled analyst consensus, Lloyds’ pretax profit is expected to be £1.62bn, down from £1.86bn last year.
Banks have offered better mortgage and savings deals in recent months as competition in the market heats up. Analysts expect Lloyds’ NII to fall to £3.18bn from £3.44bn.
Lloyds launched a plan in February 2022 to invest £4bn over the next five years to diversify away from interest rate-sensitive income streams like mortgages and become a “digital leader”.
The market will also look for any updates on the lender’s exposure to potential compensation payouts from the Financial Conduct Authority’s review of now-banned discretionary commission arrangements on car loans.
Lloyds, which owns the UK’s biggest auto lender Black Horse, made a £450m provision for the probe in February, but analysts estimate it could be on the hook for as much as £3.5bn.
Barclays
Barclays is expected to report a pretax profit of £1.97bn for the three months, up from £1.89bn a year prior. Meanwhile, its NII is tipped to remain broadly flat at £1.61bn.
Investors will be keen to see if Barclays has cashed in on the rebound in dealmaking and capital markets activity that boosted profits among its Wall Street rivals last quarter.
Barclays is under pressure to revamp its investment bank, which some investors consider a volatile revenue stream and sub-scale compared to US giants like JP Morgan and Goldman Sachs.
The unit contributes around half of Barclays’ income but consumes nearly two-thirds of its risk-weighted assets. In February, chief executive CS Venkatakrishnan said he aimed to bring that figure down to around 50 per cent.
“It will be interesting to see the extent to which the big banks have enjoyed a similar boost to their US peers when it comes to trading revenues and investment banking advisory fees,” Rothwell said.
Natwest
Estimates put Natwest’s pretax profit at £1.63bn, up from £1.33bn last year. Its NII is expected to rise to £2.78bn from £2.69bn.
The bank’s stock price has surged 64 per cent this year after installing a new management team and posting strong results that beat estimates. It has also made deals to acquire most of Sainsbury’s Bank and part of Metro Bank’s mortgage book.
Overall, the FTSE All-Share Banks index has jumped 22 per cent so far this year in a sign of investors’ confidence in the sector.
“We expect the banks to report resilient performance for the period and for management teams to reiterate their confidence in the full year outturn,” Greenwood said.