UK banks Barclays PLC and NatWest Group PLC are expected to outperform peers HSBC Holdings PLC and Lloyds Banking Group PLC in terms of profit growth in 2024 on the back of stronger net interest income.
Barclays and NatWest are projected to achieve even higher net profits than in the bumper 2023, while their largest peers are forecast to book profit declines year over year, according to consensus analyst estimates compiled by Visible Alpha, a part of S&P Global Market Intelligence.
Net interest income (NII), which has been a key profit driver for banks amid higher rates, is expected to fall at HSBC and Lloyds Banking Group in 2024, versus a largely stable NII at Barclays and an NII increase at NatWest compared to a year ago, the data shows.
NII is the difference between the interest banks earn on loans and the interest they pay on deposits. It remained resilient across all Big 4 UK banks in 2024 to date, helped by fewer-than-expected central bank interest rate cuts and structural hedge income, which offset some of the rate-related headwinds such as deposit repricing and mortgage margin compression.
"The year has been better than initially anticipated for large UK banks. ... We are looking at still very strong results, very strong return on equity, in addition to lower loan loss provisions," said Vitaline Yeterian, senior vice president, European financial institution ratings at Morningstar DBRS.
While the performance outlook for all four banks is positive, Barclays and NatWest navigated rate-related challenges better than HSBC and Lloyds, booking higher NII for the third quarter versus the same period of 2023, unlike their peers, Market Intelligence data shows.
At roughly 8%, NatWest reported the strongest NII growth among the sample in the third quarter, giving it a total of £2.9 billion. It also grew net profit by 34% to £1.25 billion for the period, the data shows. Barclays' third-quarter NII increased nearly 2% year over year to £3.3 billion, and its net profit grew nearly 19% to 1.82 billion.
Both banks raised their full-year guidance for the second time this year, with NatWest now aiming at 15% return on tangible equity (ROTE) and revenue of £14.4 billion in 2024, compared to the previously upgraded targets of 14% ROTE and £14 billion of revenue. Barclays raised its 2024 NII targets to more than £11 billion at a group level and to £6.5 billion in its domestic unit, Barclays UK, from the previously upgraded goals of about £11 billion for group and £6.3 billion for UK-based NII.
Peer comparison
Analysts consider the two lenders well positioned for further profit growth, and they are facing fewer challengers than their peers. NatWest's second guidance increase highlighted the bank's confidence in delivering strong results for the rest of 2024, CFRA equity analyst Firdaus Ibrahim said in a Nov. 16 note. "We expect to see upgrades in consensus forecasts in the coming months."
NatWest has shown "attractive NII momentum" going into the second half of 2024 and has a simpler structural hedge than some of its domestic peers, RBC Capital Markets analyst Benjamin Toms said in a note following the bank's third-quarter earnings release Oct. 25. The bank's limited exposure to an ongoing Financial Conduct Authority review of motor finance commission arrangements is also a positive, according to the RBC analyst.
Barclays' increased NII outlook for its UK business, underlying revenue strength in its investment bank division, as well as "another quarter of cost control and lower provisions, will continue to drive upgrades to consensus we believe," Morgan Stanley analyst Alvaro Serrano Saenz de Tejada said in an Oct. 24 note.
Barclays and NatWest are the top picks among large domestic banks as they are best placed to benefit from expected near-term NII growth and structural hedge income as the UK economy is positively geared toward rate cuts, according to a recent UBS analysis.
Lloyds' outlook is more muted, given the group's smaller structural hedge tailwind, continued mortgage spread pressures and uncertainty around its motor finance business, the analysts wrote in an Oct. 14 note. UBS has "buy" ratings on Barclays' and NatWest's stock and "neutral" ratings on Lloyds and HSBC.
Lloyds, HSBC headwinds
Lloyds' third-quarter NII fell almost 8% on the year to £3.08 billion, driving a roughly 6% decline in net profit to £1.32 billion. The UK's largest mortgage lender has spoken about loan refinancing headwinds, especially related to variable rate mortgages, that are stronger than peers such as NatWest and Barclays but expects these pressures to subside in the coming quarters.
Mortgage balance growth and hedge income boosted Lloyds' third-quarter net interest margin, which is expected to stay on a positive trajectory in the near term, CFO William Chalmers said during an earnings call Oct. 23.
Analysts remain cautious on the outlook after a recent UK court ruling declared it unlawful for car dealers to receive a commission from the bank providing the motor finance loan without getting prior informed consent from the customer. This, coupled with the FCA review of legacy commission arrangements, could result in a large-scale compensation scheme to which Lloyds would be highly exposed as it owns the UK's largest car finance provider, Black Horse.
HSBC's recently announced restructuring under new CEO Georges Elhedery created some uncertainty around group performance. HSBC plans to simplify its structure, most notably establishing separate business units for its two core markets, the UK and Hong Kong, from January 2025.
Upfront expenses linked to the revamp would be more than offset by the cost savings it generates, Elhedery told analysts during an Oct. 29 earnings call. More details on the reorganization and cost-cutting efforts will be revealed with the bank's release of its annual results in February 2025.
Analysts also flagged risks related to HSBC's Hong Kong business, which faced a surge in nonperforming loans and additional provisions amid the commercial property market turmoil in the region this year.
Tensions between the US and China could have a knock-on effect on HSBC's business in Hong Kong, Morningstar DBRS said in an Oct. 30 commentary on the group's third-quarter results and announced restructuring. While Hong Kong remains "an important pillar of profitability of the group, it is also a potential source of revenue and capital volatility," the analysts said.
