UK Banks Expected to Deliver Modest Gains Amid Uncertainty

Major UK banks are expected to report modest profit increases, but ongoing economic uncertainty could lead to higher provisions and concerns among investors.

Temporary Reprieve

UK banks initially caught the notice of investors due to the prospect of lower interest rates boosting borrowing, which in turn would benefit the UK residential sector. Bank share prices rose in the first quarter after strong earnings in the previous year and positive projections for 2025. However, the economy has since shown worrying signs; interest rates remain high, and the housing sector continues to face pressure. While the BOE is expected to ease further, trade uncertainty has dampened economic growth forecasts and might impact bottom lines through increased provisioning.

Naturally, the trade uncertainty has affected banks differently, with Lloyds and NatWest being the least impacted ahead of earnings, while Barclays, HSBC, and Standard Chartered have suffered more. Generally, the more internationally exposed a bank is, the greater the impact of trade war concerns and investor worries. However, this also presents an opportunity if the trade situation resolves. Meanwhile, investors are likely to favour UK-focused banks, as the BOE's easing stance and Britain's relative insulation from tariff issues could make them attractively valued, according to UBS analysts.

Analyst Expectations

Lloyds is expected to see solid profit growth in Q4 to £984 million from £568 million last year, despite a modest increase in net interest income to £3.29 billion from £3.27 billion in the comparable period. Analysts praise the bank's cash generation but remain wary about the pending auto finance ruling.

NatWest, not exposed to the auto finance issue, is another analyst favourite. Profit is forecast to increase slightly to £1.45 billion from £1.26 billion a year earlier, with net interest income expected to remain stable at £2.99 billion. However, analysts expect a significant increase in impairments for the quarter.

HSBC is expected to see its income return to normal after last year's major outperformance, with net profit projected at $5.64 billion, compared to $10.8 billion a year ago, which included a $3.42 billion gain from asset sales. Net interest income is expected to rise to $10.6 billion from $8.65 billion a year ago; however, investors are concerned about the company's exposure to the Asia region.

Barclays' position in the mortgage market might be interesting, but its exposure to the US market and potential impact from a stronger pound could offset this. Profits are projected at £1.68 billion for the last quarter, up from £1.55 billion in the same period last year, with net interest income slightly lower at £3.01 billion compared to £3.07 billion a year ago.

Lloyds V-Shaped Recovery Hints at Upside

Lloyds recently topped out at 74.50 GBX but quickly formed a V-shaped recovery after falling to 62.5 GBX, bouncing off the trendline connecting 73.50 and 70 GBX. The rejection at support opens the door to the 80 handle and the measured move projection of the 23.50-56 GBX rally from 52.5 GBX to 85 GBX. Consolidation is possible if prices fail to surpass the recent high, while a break of 70 GBX could lead to lower prices, potentially reaching 56 GBX, which could open the door to a further decline to 40 GBX.

Source: SpreadEx / Lloyds

Key Takeaways

UK banks are expected to report mediocre profit increases for Q4. Ongoing economic uncertainty and trade tensions could lead to higher provisions, raising investor concerns, but banks focused on the UK present opportunities due to the BOE's easing and relative insulation from tariff issues. Analysts have varying expectations, though, with Lloyds and NatWest being the favourites, as HSBC's Asia exposure and Barclays' US exposure raise concerns.