US tariff regime prompting UK banks to ramp up bad loan provisions

Large UK banks are expected to increase their loan loss provisioning as they brace for the potential impact of US tariffs.

The US in early April unveiled a slew of tariffs on global trade partners will leave the UK facing a 10% blanket levy on exports to the US. The new tariff regime has also created a significant amount of uncertainty across the global economy.

Although they see any fallout as manageable, HSBC Holdings PLC, Barclays PLC, NatWest Group PLC, Lloyds Banking Group PLC and Standard Chartered PLC are all set to make more provisions for loan and lease losses this year than they did in 2024, according to data from Visible Alpha, an S&P Global company.

Bracing for bad loans

Lloyds is expected to set aside £1.14 billion in 2025, compared to £430 million in 2024; NatWest £820 million up from £360 million; HSBC £2.84 billion compared to £2.73 billion; Barclays £2.28 billion versus £1.98 billion; and StanChart £700 million compared to £440 million.

Of the five big UK banks, HSBC and StanChart are expected to record lower full-year net income, according to Visible Alpha. Barclays, Lloyds and NatWest are expected to post increases.

The head of the UK's Prudential Regulation Authority, Sam Woods, also sees an economic slowdown prompted by the tariffs leading to to higher provisioning by banks.

"It will be interesting to see whether our banks in the next period choose to provide more for a different economic environment because they do forward-looking provisions now," he said at an April 29 Treasury committee meeting.

Barclays said its medium-term targets remain achievable despite a more volatile global environment, while HSBC plans to take advantage of the global supply chain shake-up caused by the tariffs to attract new clients and increase market share in the trade business. Lloyds and StanChart said the potential impact of the tariffs on their businesses is limited.

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Higher-than-expected first-quarter profits

HSBC, Barclays, NatWest and StanChart all booked higher-than-expected net income in the first quarter, and all five banks beat net interest income (NII) expectations.

NatWest booked the largest year-over-year increase in net profit, up 41% to £1.27 billion, which was roughly 15% higher than analysts' expectations.

The bank left its full-year guidance unchanged despite the strong first quarter, due to "wider uncertainty" it must now take into account, CEO Paul Thwaite said on an earnings call. NatWest aims to achieve a return on tangible equity at the upper end of the 15% to 16% range and income, excluding notable items, towards the upper end of between £15.2 billion and £15.7 billion in 2025.

StanChart logged the biggest surprise to the upside in terms of analysts' expectations for net income. The bank, whose business focuses on markets in Asia, the Middle East and Africa, booked first-quarter profit of £1.16 billion, 19% higher than analysts' projections.

HSBC was by far the largest earner among the sample of the UK's five largest banks, with first-quarter net profit of £5.42 billion, up 5% on a year-over-year basis. It was also the only lender that recorded a decline in net interest income, though its £6.43 billion profit still beat analyst expectations. HSBC's banking NII fell 6% to £7.95 billion, driven by disposals in Canada and Argentina, as well as adverse impact of about $300 million from foreign currency translation differences. Despite this, HSBC still expects to reach its target banking NII of $42 billion for the full year.

Barclays recorded first-quarter net profit of £1.86 billion, up from £1.55 billion a year ago, driven by a surge in fixed-income trading revenue amid tariff-driven market volatility and higher NII.

Group NII increased 14.5% on a yearly basis to £3.52 billion, mainly due to an 18% uptick in its UK business to £1.82 billion. This led to Barclays upgrading its expected banking NII for 2025 to £12.5 billion from an initial £12.2 billion.

Motor finance impairment

Lloyds incurred the largest earnings deterioration among the sample, logging a net profit of £1.01 billion, down nearly 6% from the previous year. Results were weighed down by impairment charges, which more than tripled to £309 million from £57 million the previous year.

The bank, which has already earmarked £1.15 billion since late 2023 for the potential impact of a motor finance review, is awaiting a Supreme Court ruling and the Financial Conduct Authority's decision on a potential compensation scheme for motor finance misselling.

Lloyds does not expect any changes in provisions for its Black Horse Ltd. motor finance business until at least the third quarter, CFO William Chalmers said in an earnings call.