UK Banks Prepare to Report

According to analysts' forecasts, rising interest rates are anticipated to have positive financial implications for the major UK banking institutions. The sector's four largest players are projected to achieve strong profits collectively.

Valuation Reassessment

UK bank share prices have traded below estimated fair value for an extended period, prompting examination from various authorities regarding potential causes. The UK's Finance Minister, Jeremy Hunt, attributed this partly to lingering Brexit effects. Bank of England (BOE) Governor Andrew Bailey also commented that major UK banks' cost of risk remains too elevated. However, during recent turbulence among European and US regional banks, the UK avoided distress, underscoring the resilience of its system.

Improving Performance Indicators

Now, banks are positioned to report sizeable earnings growth. Market participants will evaluate whether confidence in the leading UK financial institutions strengthens. Analyst projections suggest the large banks will maintain sound underlying performance over the next two years, as signalled through upcoming quarterly financial statements. Net interest margins are expected to contract marginally, but impacts on the largest players will likely prove minor.

Focus on Capital Distribution

Projections foresee the sector's "Big Four" collectively achieving £45 billion in profits for the prior year, with attention to capital allocation policies. Lloyds (reports Feb 22) may face additional conduct-related charges reviewing motor financing, potentially requiring to put aside more for provisions. For NatWest (reports Fri 16), the government's residual stake sale remains a key consideration.

Barclays (reports Feb 20) anticipates 32% lower Q4 profits of £957 million but plans up to £1.75 billion share buybacks. Lloyds is projected to grow profits by 20% to £2.05 billion while also returning £1.75 billion via buybacks. NatWest forecasts 35% lower profits of £998 million and matching capital distribution. Leveraging international franchises, HSBC (reports Feb 21) could achieve a 14% profit increase to $7.5 billion in Q4 and plans $9 billion in buybacks.​

NatWest Stands Out

Two of the four stocks, Barclays and Lloyds, are trading within a long-term range. Meanwhile, HSBC has remained relatively high and further upside may be limited. In contrast, NatWest has seen a significant correction, and the 'Golden Pocket' rejected its attempt to break lower. Having exited its bearish channel and retested support slightly above the 50% Fibonacci, a break above 230p could raise prices to 263p in the medium to long term. Alternatively, a break below 200p could see prices fall back to around 170p again if 185p is breached​.

Source: SpreadEx / NatWest Group

Key Takeaways

Recent analyst forecasts anticipate that rising interest rates will have positive financial implications for major UK banks, with projections showing the sector's "Big Four" banks collectively achieving £45 billion in profits for the prior year. Attention will be given to capital allocation policies as Barclays, Lloyds, and NatWest all plan share buybacks totalling £4.5 billion while maintaining sound underlying performance, as signalled through upcoming quarterly financial statements.​