The UK's biggest banks are projected to report declining third-quarter profits as provisions for bad loans rise, analyst estimates show.
Net profit is forecast to fall quarter over quarter at the country's four largest lenders — HSBC Holdings PLC, Barclays PLC, Lloyds Banking Group PLC and NatWest Group PLC — according to consensus estimates compiled by S&P Global Market Intelligence and Visible Alpha, a part of Market Intelligence. Compared to a year ago, NatWest is the only bank expected to book a net profit increase, the estimates show.
The banks are forecast to increase their loan loss provisions in the third quarter versus the second quarter, with Lloyds and HSBC recording the most significant additions, according to the data.
Loan loss watch
Analysts have been more cautious in loan loss estimates for Lloyds so far this year due to risks associated with the group's exposure to a regulatory probe of legacy motor finance agreements that could lead to a large-scale redress scheme, as well as risks to Lloyds' sizable mortgage portfolio amid economic pressures in the UK.
Yet, Lloyds has surprised the market with better-than-expected results before. Its impairments for the second quarter came in at only £44 million, compared to a consensus estimate of £305 million, according to Deutsche Bank Numis data.
Lloyds' overall allowance for expected credit losses stood at £3.8 billion as of June 30, which is £500 million above the bank's base case scenario for expected credit loss needs and higher than pre-pandemic levels, CFO William Chalmers said during the group's second-quarter earnings call.
This provides ample coverage for future risks, giving Lloyds confidence in the strength of its asset quality, as the bank has also cut is 2024 loan loss guidance to less than 20 basis points of gross customer loans and advances, Chalmers said.
At HSBC, analysts are still closely watching the group's exposure to the Hong Kong commercial real estate (CRE) market as further property defaults there would increase the stock of nonperforming loans (NPLs) on HSBC's balance sheet. HSBC booked $1.4 billion in new NPLs for the second quarter, driven by Hong Kong CRE, yet the impact on group expected credit losses was limited, CEO Georges Elhedery said on a quarterly earnings call July 31.
While the asset quality outlook for HSBC remains benign, there is a risk that Hong Kong CRE-related NPLs could increase further in the third quarter, Morgan Stanley analysts said in an Oct. 7 note.
Positive net interest income outlook
Net interest income (NII) — the difference between the interest lenders earn on loans and pay on deposits — is projected to grow quarter over quarter at all banks apart from HSBC. NatWest is the only bank expected to book a year-over-year increase. Banks' interest earnings in 2023 were exceptionally high due rapid central bank rate hikes.
In 2024, NII growth has started to moderate, yet remains resilient at all banks, with Barclays and NatWest recording the smallest changes compared to a year ago, Market Intelligence data shows. Barclays' NII has remained largely stable at £3.1 billion between the fourth quarter of 2023 and the second quarter of 2024.
After declining slightly in the last two quarters of 2023, NatWest's NII rose in the first two quarters of 2024. The bank booked about £2.7 billion in NII for the first quarter of 2024, up from £2.6 billion in the previous three months, while its second-quarter NII bounced back to the prior-year level of about £2.8 billion, the data shows.
Although the Bank of England has started cutting interest rates, the outlook for UK banks' NII remains positive thanks to structural hedging, which the banks use to protect themselves from rate shifts.
Domestically focused UK banks should achieve mid-single-digit NII growth from structural hedge tailwinds even as the central bank is expected to cut its base rate to 3.0% by late 2025, from the current level of 5.0%, according to UBS analysts. The UK economy and sovereign bonds are positively geared to rate cuts, the analysts said in an Oct. 14 note.
UK-focused lenders — including Lloyds, NatWest and the UK arm of Barclays — should see pre-provision profit boosts in 2025 ranging from 8% for Barclays and Lloyds to 16% for NatWest from structural hedge roll, the analysts said.
For Asia-focused HSBC, NII growth could be more challenging with Hong Kong CRE and capital market-linked wealth operations being under close watch, the analysts said. "[Third-quarter] results will be important for any changes on NII guidance," the analysts noted on HSBC.