UK Banks Outlook Mixed, But BOE Offers Silver Lining

As investors look toward when the BOE may start easing interest rates, UK banks are projected to see a slight improvement in financial performance during the first half of this year.

Economic Recovery, but Profits?

One concern weighing on UK banks over the last couple of years has been the expectation of an economic slowdown requiring larger provisions. This negatively impacted profitability as banks increased reserves in a high-rate environment. However, the UK dipped into a technical recession last year, and all indicators since point to a decent, if not strong, rebound. This could allow banks to start releasing reserves, providing relief to investors.

The challenge for current investors is that traders have priced in the improving situation, pushing shares of Barclays up around 50% this year, with Lloyds also rising 20% in the same period. Now, investors will watch to see if financial results match the optimism as Lloyds kicks off the UK bank earnings season on Thursday. Lloyds and NatWest may see earnings drop amid tight lending competition. However, with a consensus that the BOE nears rate cuts, investors may overlook this as lower rates could decompress the housing market.

What the Numbers May Show

For the second quarter versus the first, Lloyds is projected to see lower income from facing higher costs and marginally lower net interest income, per analyst consensus. Profits are seen at £1.16 billion compared to £1.22 billion prior, despite a slightly improved net interest margin of 2.95% as it incorporates Halifax.

NatWest is expected to show a similar pattern, with attributable net profit seen declining to £843M last quarter versus £918M prior. Total income may fall slightly to £3.41 billion from £3.48 billion prior. Notably, provisions are seen improving to -£93 million from -£161 prior.

Barclays could see a more dramatic reversal, with consensus for Q2 being £948 million compared to £1.55 billion prior. This considers total income falling to £6.16 billion from £6.95 billion in the previous quarter.

Lloyds Outside Triangle

Lloyds upside appears impulsive following the move beyond the triangle pattern that previously ended at 41 pence per share. This opens the possibility of reaching the projected measured-move target of 66 pence per share, with resistance past that at 70 pence. However, if momentum wanes and the share price changes direction, a pullback could find initial support near 54 pence per share unless the decline extends to retest the breakout level near 47 pence per share.

Source: SpreadEx Lloyds Banking Group

Key Takeaways

UK banks are projected to see a slight improvement in financial performance during the first half of 2024 as the economic recovery continues. While Barclays and Lloyds shares have risen significantly this year on expectations of an economic rebound in the UK, analysts expect the upcoming earnings reports to show declining profits. However, investors may look past this as the BOE is seen nearing interest rate cuts later in the year, which could boost the housing market and ease pressures on bank margins over time.
​