UK Banks Expected to Report Good Income

While consumers face a cost of living crisis, one of the sectors expected to do better, and increase profitability, is banks.

The Bank of England might be dealing with a massive headache of high inflation as the country teeters on recession (narrowly avoiding it on a technicality so far), but private banks are expected to keep generating good income thanks to the BOE's actions. Higher profits could lead banks to raise dividends, but that depends on how much they set aside for provisions. Politicians have been looking increasingly closely at profits in the current environment, and if the major banks post profits in excess of the gains from 2007, as some analysts forecast, the share price rally could be short-lived if there is talk of raising taxes in the aftermath.

NatWest to Report Highest Profits Since '08

Although NatWest is one of the banks expected to report the highest profits since the great financial crisis, it could have some of its profitability trimmed for other circumstances. The stock price has risen, and given the arrears situation with the UK Treasury, it might be an opportunity to reduce some of the government's holdings in the company. If the bumper crop of profits is used to buy back shares from the Treasury, it could pare back on earnings. While typically, a share buyback helps boost the stock price, because the government isn't an active trader, it might not have as much of an impact in the case of NatWest.

Lloyds Faces Cost of Living Issues

Lloyds is, of course, the largest retail bank in the UK, which means it could be subject to higher loan loss provisions as consumers take out more credit in the face of cost of living issues. The consensus of analysts compiled by the bank itself expects the net interest margin to expand to £3.5B but net income to nearly triple quarter-on-quarter from £420M to £1.2B.

HSBC to Benefit from Higher Rates, China

Although it has a major presence in the UK, investors might be more interested in HSBC because of its exposure to China. The bank stands to benefit from higher rates in the UK and the expected growth of the world's second-largest economy now that it has put covid behind it. Therefore, guidance in relation to China is likely to get more attention. The bank already guided over $36B in net interest income for next year but will likely provide more details with the earnings release.

Lloyds Lags Behind

Since the beginning of the year, all three have risen pretty much about the same amount: between 17.5% and 19.5%. Notably, the YTD gains are outstanding, but so far in February, none of the stocks has been able to break past January's peak and are correcting.  

When adding the last quarter into the mix, there is a clear winner, Natwest, with a 55% rise. HSBC comes next, with a gain of 43%, and last is Lloyds, having recorded a 32% upside. Being further from the leader, Lloyds might be due to a catchup move, as it also seems it is closer to breaking to fresh highs.

Source: Barchart

Key Takeaways

UK banks are expected to report higher profits in the current environment, potentially leading to dividend increases and share buybacks, however, these could be trimmed by loan loss provisions and some share buybacks being used for government holdings. NatWest is expected to post the highest profits since the great financial crisis, HSBC stands to benefit from higher rates in the UK and China's growth, and Lloyds is facing the cost of living issues. The stocks have all risen roughly 17-19% YTD, with Lloyds lagging at 32% since Q4.