Big banks set for bumper annual profits as interest rates peak
Britain’s biggest banks are set to report strong annual profits over the next two weeks despite mounting margin pressure from a likely peak in interest rates.
Natwest is due to report full-year results on Friday, followed by Barclays next Tuesday and HSBC next Wednesday.
Lloyds Banking Group – including Lloyds Bank, Halifax, Bank of Scotland and Scottish Widows – will round out the results season next Thursday.
Analysts expect these firms, collectively known as the Big Four, to rake in as much as £47bn in profit between them on the back of higher interest rates.
Britain’s biggest lenders have benefited from a jump in net interest income – the difference between what a bank pays out to savers and receives in interest from loans – since late 2021 as the Bank of England hiked borrowing costs in a effort to slow down inflation.
The final quarter of 2023 is expected to show more pressure on banks’ net interest margins (NIM) as consumers adapt to the higher rate environment and lenders come under pressure to offer savers better deals.
Lenders have slashed their mortgage rates in recent months to compete for business in a market shrunk by economic turmoil, while customers are taking advantage of higher-interest savings accounts.
“We’re expecting banks to have closed out a very good year, and it will be interesting to see how the Q4 performance compares to the previous quarter given the pressure on NIM we saw in those results,” Peter Rothwell, head of banking at KPMG UK, told Morning Wire
“With continued competition in the UK mortgage market and for retail deposits, we may see some pressure on margins continue.”
The UK has likely hit a peak in interest rates, with the central bank widely expected to make multiple cuts over the course of 2024.
Analysts expect HSBC to drive much of the strong performance and post record profits. The Asia-focused giant used the boon from rate hikes to award £8.4bn in dividends last year – nearly double the £4.4bn it paid in 2022.
Lloyds – the UK’s largest domestically focused bank – and Natwest – which is 35 per cent owned by the government – are also expected to see an increase in annual profits.
The former’s shares have been hit by news of a review into historic motor finance commission arrangements by the City watchdog, which analysts have said could cost the bank up to £2bn in compensation payouts.
Meanwhile, Natwest is looking to draw a line under a headline-grabbing “debanking” scandal that as it gears up for new leadership and a much-hyped retail offering.
Barclays is the only one of the four not expected to post a rise in annual profits as it undergoes a costly restructuring that saw around 5,000 layoffs in 2023.
Investors will be keen to hear more details about chief executive’s CS Venkatakrishnan’s plans to cut costs and boost the bank’s share price.
Bank bosses across the board will likely face questions over their weak share price performances. HSBC was the only Big Four bank to see its stock rise last year as investor confidence in the sector was hit by economic uncertainty.
Rothwell added: “Consumers are cutting back and putting more payments on credit as they deal with the increasing cost of living, so we may see a rise in impairments. While these are currently low by historical standards recent data suggests impairments are picking up, and with the full impact of interest rate increases yet to be felt, these disclosures will be keenly watched by investors.
“In this context, updates related to strategy and the progress of cost initiatives will also be an area of focus. With banks facing into an uncertain geopolitical outlook, how much consumers will benefit from this bumper year remains to be seen.”