Natwest and Lloyds: What to expect from FTSE 100 bank earnings next week
The FTSE 100’s banking titans, Natwest, Barclays, Lloyds and HSBC are gearing up for what promises to be an interesting half-year reporting season.
Lloyds and Natwest will kick off earnings on July 24 and July 25 followed by peers Barclays, HSBC and Standard Chartered the following week.
The first quarter was defined by President Donald Trump’s return to the White House as trading income spiked on the back of numerous investor sell-offs ahead of ‘Liberation Day.’
The White House’s tariff onslaught, which took place at the beginning of the second quarter, sent bank stocks tumbling.
The FTSE 350 banks index sank to a low of 4,700.7 in the fallout, but trade deals and recovering investor confidence have helped it recover over 2,000 points to surpass 6,100.
Provisions across banking giants climbed in first quarter reports with HSBC raising expected credit losses to $876m, from $202m, and Barclays setting aside £74m for “elevated US macroeconomic uncertainty”.
Despite this, analysts expect the Trump administration’s trade policy to have had less of an impact in the second quarter.
“Tariff risks feel much lower now, as the US administration has delayed most of their ‘Liberation Day’ tariffs, and it now appears that the US administration is using tariffs as a tool to negotiate with their trading partners,” analysts at the Bank of America said.
They added that UK domestic banks were “less exposed to tariff risks” after the government brokered a trade agreement with the US in May.
Rates drop, margins squeezed
British banks have fixed their focus on the Bank of England’s Monetary Policy Committee, with rate cuts set to take a chunk out of their bottom line.
The FTSE 100’s Big Five banks pocketed record total profits in 2024, topping £50bn after interest rates held at a post-financial crisis high for the first half of the year.
However, the MPC has reduced interest rates from highs of 5.25 per cent to 4.25 per cent in the year, forcing lenders to diversify their revenue streams.
Bank of America analysts said the period would be an “ok quarter” with underlying trends “broadly supportive” but warned of “some net interest income (NII) pressures”.
Lower volumes in NII are pencilled in for the quarter, after the first quarter benefited from a bump in mortgages as Brits rushed to beat the stamp duty deadline.
Chancellor Rachel Reeves changed zero rate thresholds for main residences, which dropped from £250k to £125k, with first-time homebuyer thresholds dropping from £425k to £300k from March 31.
This triggered a surge in mortgage lending with Natwest’s net loans to customers increasing £3.4bn to £371.9bn.
Natwest and Lloyds are likely to bear the brunt of pressures due to their domestic lean, when compared to their peers.
A welcome surprise
Whilst NII is expected to be squeezed, analysts said “non-NII may have more potential to surprise positively, as volatility remained high in the quarter”.
Despite calmer waters for the UK, trading income is still expected to play a factor in reports after the ‘Liberation Day’ rebound.
The City’s Wall Street rivals witnessed increases in market income in the quarter.
JP Morgan recorded a seven per cent jump in investment banking fees and 15 per cent in equities trading revenue.
Jame Dimon, the chief of the Wall Street behemoth, said investment banking activity “started slow” in the quarter amid the confusion of Trump’s tariffs but gained as markets recovered.
Barclays, HSBC and Standard Chartered are also set to enjoy a boost from Asia wealth inflows, which “remained strong”.
Asia has become a core pillar of HSBC’s wealth management strategy – a division the lender doubled down on in the second quarter with a $4bn injection into its private credit arm.
Meanwhile, Barclays has renewed a push into Asia’s private banking market, with a target of ultra-high-net-worth clients and family offices in Singapore and India.
Standard Chartered’s finance boss, Diego De Giorgi, told Bloomberg television wealth “flows have continued strongly during the past two months”.
Takeover talk
Merger and acquisition speculation ramped up in the second quarter and boiled over as Santander snapped up TSB Bank.
Numerous lenders were reported to be in the running for the high street unit, including Barclays and Natwest.
Natwest was also reported to have lodged an £11bn bid for Santander as the giant accelerated its deals after re-entering privatisation.
Bank of America analysts said it was “possible Barclays and Natwest could surprise on buybacks” with neither takeover bids successful “more capital could come back via buybacks at the half year”.
Barclays is projected to launch a £1.5bn share buyback, whilst Natwest could be set for £1bn, analysts predicted.
Dark clouds
Despite what looks to be a steady quarter rounding off a solid half-year for lenders, dark clouds in the shape of a landmark Supreme Court ruling and an unnerving Autumn Budget loom in the second half.
The Supreme Court is set to hand down its judgment on the motor finance scandal this month, with wide implications for Barclays and Lloyds.
Lloyds has set aside £1.2bn in provisions for potential payouts, whilst Barclays is on the hook for £90m.
Analysts have warned that total compensation claims for the sector could exceed £40bn if an adverse ruling is reached.
The Financial Conduct Authority has pledged a six-week redress scheme, which is expected to reveal the full breadth of repercussions for lenders within six weeks of the verdict.
Meanwhile, UK banks will be forced to keep an anxious eye on Autumn Budget tax hikes as Rachel Reeves scrambles to maintain her wafer-thin fiscal headroom.
Analysts said: “The worsening fiscal position in the UK will likely raise questions around the possibility of bank taxes, potentially slower economic/volume growth in the case of more general tax rises which would compress household disposable income and corporate profitability.”
A leaked memo penned by Angela Rayner ahead of April’s Spring Statement revealed Prime Minister Sir Keir Starmer’s second-in-command lobbying for an annual £700m hike on the banking sector.
The Deputy Prime Minister proposed the surcharge on banks be hiked to five per cent, which would effectively set corporation tax for banks at 30 per cent.
The banking industry body UK Finance has raised concerns that this would put the UK at a greater disadvantage compared to global sector peers in other countries that have significantly more attractive tax policies.
A report UK Finance submitted ahead of the Autumn Budget found the sector’s total tax rate in London is 45.8 per cent for 2024. This dwarfed European rivals Amsterdam (42 per cent), Frankfurt (38.6 per cent) and Dublin (28.8 per cent).
Bank of America economists expect Reeves’ headroom, which currently sits at £10bn, to shrink between £20-30bn.
As the Chancellor turns to tax raising avenues in the Autumn, banking chiefs will be holding out hope that Rayner’s note remains a mere recommendation and not a roadmap.