Profit looks set to increase at the UK’s largest lenders as they line up to report first quarter earnings over the coming two weeks.
The FTSE banking giants have seen relative stability over the last few weeks following the extreme volatility in March, but this stability means investors will refocus their attention on other major issues in the sector.
Foremost among them is how banks’ profitability will be impacted by the Bank of England’s attempts to contain inflation.
Over the past year the Bank of England has hiked rates eleven times in a row. This has widened banks’ net interest margin – the difference between what they pay out and receive in interest payments – helping to generate bumper profits.
Last quarter, investors were disappointed by the conservative forward guidance given by banks which suggested that peak profits from interest rates had passed.
In recent weeks however large US banks beat expectations, delivering substantial profits boosted by higher interest income suggesting there could be more gains to come from higher rates.
Analysts at UBS noted that “with average policy rates still rising strongly in 1Q23…that guidance still looks cautious.” The biggest beneficiaries of this are Lloyds and Natwest, both of whom have large mortgage books.
According to company compiled consensus, Lloyds expects to report pretax profit of £2.0bn, up 26 per cent on the same period last year. The bulk of this increase comes from a boost in net interest income which analysts expect to rise 22 per cent year on year.
Natwest is also expected to report a 46 per cent increase in net interest income, which would help profit to grow by a third to £1.6bn.
At Barclays, analysts expect profit to be flat on last year. While its UK division will benefit from higher rates, Barclays also has a large investment banking division which will probably have been hit by the prolonged slump in deal-making. .
However, trading revenues are also likely to be fairly strong, partially offsetting the hit from investment banking.
At HSBC – who haven’t released consensus estimates for the quarter – all eyes will be on how the results influence the shareholder campaign to spin off the bank’s Asian business.
In February, chair Noel Quinn drew attention to the bank’s strong performance of the bank’s European and middle eastern divisions and announced a range of payouts in an attempt to win over the bank’s disgruntled shareholders.
A poor performance could incentivise more shareholders to join Ping An in voting for proposals to fundamentally restructure the bank.
Standard Chartered kick off the earnings season on Wednesday. The emerging markets focused lender has had a relatively quiet few months after recurring rumours earlier in the year that it was a takeover target for First Abu Dhabi Bank.
Standard Chartered is expected to report a pretax profit of £1.4bn, down slightly on the £1.5bn it reported last year. The recent strong performance of the Chinese economy could help boost the bank, while it has also invested heavily in the Middle East.
Although the banks are expected to report healthy earnings, their reports will be scrutinised for signs that UK consumers are faring less well.
Higher interest rates always bring the possibility that borrowers will face financial difficulties as the costs of paying back debts rise. Banks have set aside significant sums in loan loss provisions over the past few months and there is likely to be more to come over the coming weeks.
Natwest expects to report impairment losses of £250m in the quarter, up from £144m last year while Lloyds expects impairments costs of £356m rising from £177m last year.
Barclays also expects to put aside £563m, up from £141m in the same period last year.
However, analysts at UBS said they expect “no deterioration in credit quality and think loan losses are lower risk than feared.”
Standard Chartered will release earnings on Wednesday before Barclays on Thursday and Natwest on Friday. Following the bank holiday weekend, Lloyds report on Tuesday 2 May and HSBC round things up on Wednesday 3 May.