Key Takeaways
- U.K. banks reported robust results in 2024, with widening margins and solid returns on capital.
- Banks should also perform well in 2025, with elevated profitability and robust capital, funding, and liquidity.
- Our stable outlooks on all the rated U.K. banks indicate limited rating upside or downside in 2025.
U.K. banks' 2024 results were robust. Net interest margins (NIMs) widened throughout the second half of the year as the deposit mix stabilized and rising structural hedge yields propelled margins upward for much of the sector. Alongside benign asset quality and disciplined cost control, rated U.K. banks recorded another year of solid returns on capital. They posted a weighted-average return on tangible equity (RoTE) of 13.1% on a reported basis, down 60 basis points (bps) from 2023.
Trends throughout 2024 also point toward a strong 2025. Domestic net interest income has material room to grow; cost inflation is contained; and banks anticipate a manageable rise in credit costs. In sum, this should see sector profitability remain elevated, with robust capital, funding, and liquidity. Our stable outlooks on all the rated U.K. banks indicate limited rating upside or downside in 2025.
Takeaway 1: Net Interest Income Climbed In The Second Half Of 2024 And Has Much Further To Go
The deposit migration to interest-bearing accounts, particularly fixed-term products, that drove banks' balance sheets in the second half of 2023 slowed over the course of 2024 (see chart 1). The drag on margins from repricing pandemic-era mortgage books also eased significantly. For instance, it slowed to 3 bps at NatWest in the fourth quarter and 5 bps at Lloyds. The reduced drag from asset and liability repricing enabled banks' structural hedges to push overall margins upward in the latter part of the year (see chart 2).
Chart 1
Chart 2
These structural hedges smooth the yields on banks' interest rate-insensitive balance-sheet funding, which is generally the sum of their equity, stable non-interest-bearing deposits, and a portion of variable-rate savings accounts. Total interest rate-insensitive funding on major U.K. banks' domestic balance sheets is high, exceeding £815 billion at year-end 2024, down by around £25 billion from year-end 2023.
This contained movement in structural hedge balances reflected a stable deposit mix in the system and a more limited migration of deposits to interest-bearing products than anticipated. As interest rate hedges on these balances matured, banks reinvested them at elevated rates, forcing NIM upward. For example, Barclays reported that the average rate on its hedges rose to 2.0% at the end of 2024, from 1.5% a year earlier, driven by reinvestment yields above 3.5% in 2024. To this end, we calculate that the average yield on U.K. banks' domestic structural hedges surpassed 2% in 2024, a 30 bp widening from a year earlier (see chart 3).
Chart 3
Against this backdrop, U.K. banks anticipate healthy growth in domestic net interest income in 2025 (see table 1). For Barclays, Lloyds, and NatWest, whose U.K. balance sheets are heavily hedged, this amounts to at least £3 billion of additional net interest income in aggregate, or 8% of the 2024 outturn.
Table 1
| U.K. banks' net interest income guidance | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Barclays | HSBC | Lloyds | NatWest | Standard Chartered | ||||||||
| 2024 NII* | £11.3 billion | $44 billion | £12.8 billion | £11.3 billion | $20 billion total group income | |||||||
| 2025 NII* guidance | £12.2 billion | $42 billion | £13.5 billion; £1.2 billion of upside from structural hedge | £1 billion of upside from structural hedging actions alone | Low-single-digit total income growth | |||||||
| *NII here refers to banking NII, not accounting NII. NII--Net interest income. | ||||||||||||
Takeaway 2: Motor Finance Provisions Are Contained So Far, But The Supreme Court's Judgment Is Still A Risk In 2025
Major U.K. motor finance providers continue to build provisions in anticipation of a review by the Financial Conduct Authority (FCA) and an upcoming Supreme Court appeal hearing into motor finance commissions. Lloyds topped up its existing £450 million of provisions by a further £700 million in the fourth quarter of 2024; Santander U.K. built a £295 million provision in the third quarter of 2024; and Barclays added a modest £90 million provision in the fourth quarter.
The scenarios that the banks have used to build these provisions mostly relate to the FCA's review into historic discretionary commissions and are sensitive to many underlying variables, such as the quantum of complaints, the uphold rate, the level of redress payable to each complainant, and the interest rate. Lloyds, however, has stated that it has included scenarios in its provision modeling relating to the Supreme Court appeal scheduled for April 2025.
In October 2024, the Court of Appeal judged motor finance commission payments to be unlawful where customers lacked informed consent about those payments. If the Supreme Court upholds the Court of Appeal ruling, the remediation is likely to materially exceed the potential cost of remediation related to the FCA review. Bank management comments indicate that they expect an outcome around three months after the April 1-3, 2025, hearing date. Until then, this is an important overhanging risk for the sector's motor finance providers.
Takeaway 3: Asset-Quality Deterioration Remains Muted
Weighted-average stage 3, or credit-impaired, loans made up 2.06% of rated U.K. banks' loans at year-end 2024, a tentative rise of around 6 bps from 2023 (see chart 4). However, provision coverage has fallen for most loan books, with average stage 2 coverage ratios declining to 2.96%, down 10 bps on the prior year.
The rise in stage 3 lending drove banks' full-year impairment charges, offset by provision releases from a reduction in post-model adjustments and improved economic scenarios in banks' provisioning models (see chart 5). This balance represents a reversal from prior years, when fluctuating macroeconomic scenarios and changes in performing-asset coverage levels drove impairments for U.K. banks even if actual losses were subdued.
Chart 4
Chart 5
Banks' guidance for 2025 credit losses echoes these trends. Stage 3 lending should continue to tick upward, with a steady flow of loans entering arrears and nonperformance pushing impairment charges toward the long-run average. While post-model adjustments to credit provisions remain on banks' balance sheets, their capacity to reduce charges will be lower in 2025 following material releases in 2024.
Furthermore, stabilizing macroeconomic scenarios in banks' International Financial Reporting Standard (IFRS) 9 models mean that the positive effects of improving economic outlooks on their impairment charges in the past 12 months will not reoccur this year.
What Else Is Going On In U.K. Banks' 2024 Results?
Cost discipline is driving banks' strategies
Cost discipline has been a central pillar of U.K. banks' strategies in the post-pandemic era, with banks working hard to contain cost growth and mitigate elevated wage inflation. Weighted-average cost to income was broadly flat in 2024, at 53.9% for the sector, a modest fall from 54.2% in 2023.
Even as operating expenses are under tight control, banks are committed to continuing investments in their technological and automation capabilities. For example, HSBC has committed to redeploy $1.5 billion of costs from underperforming businesses (such as Equity Capital Markets and Mergers & Acquisitions in the U.K., continental Europe, and the U.S.) into more profitable businesses. It is not alone in this, with Barclays also committing to reinvest a large portion of its £500 million cost takeout in the next 12 months back into its strategic drivers, such as its U.K. commercial and retail businesses.
Capital distributions remain high
The six major U.K. banks that have published financial results for the 12 months to Dec. 31, 2024, have distributed or announced £36 billion of dividends and share buybacks (see table 2). This reflects the strong rate of net capital generation across the industry in 2024. When combined with modest risk-weighted asset growth and the delayed implementation of Basel 3.1, U.K. banks had ample surplus capital available at the year-end to return to investors.
Table 2
|
U.K. banks' key capital ratios |
||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Barclays | HSBC | Lloyds | NatWest | Santander U.K. | Standard Chartered | |||||||||
|
CET1 ratio |
13.6% |
14.9% | 14.2% | 13.4% | 15.2% | 14.2% | ||||||||
| CET1 ratio target | 13%-14% (upper half in 2025) | 14.0%-14.5% | 13.5% | 13%-14% | N/A | 13%-14% | ||||||||
| Announced and paid dividends | £1.2 billion | $16 billion | £1.9 billion | £1.7 billion | £1.5 billion | $900 million | ||||||||
| Announced and completed share buybacks | £1.8 billion | $9 billion | £1.7 billion | £2.2 billion | None | $4 billion | ||||||||
| N/A--Not applicable. CET1--Common equity Tier 1. Source: S&P Global Ratings. | ||||||||||||||
A mixed global economic picture is having an uneven impact on major U.K. banks
Flatlining U.K. economic growth in the past year did not undermine banks' results. Banks were able to achieve loan and profitability growth despite the mixed economic backdrop.
At the same time, ongoing global economic and geopolitical instability has not affected U.K. banks evenly. Standard Chartered and HSBC, the two banks with material exposure to the pressurized commercial property markets in Hong Kong and mainland China, saw single-name commercial credit impairments rise. However, strong wealth management flows from their Asian businesses drove up returns from their international retail banks. As such, the impact of the global macroeconomy has been, and will remain, uneven for the U.K.'s major banks.
What Does This Mean For 2025?
U.K. banks' guidance indicates a solid performance in 2025. However, some banks foresee lower returns year on year. For example, NatWest anticipates a compression in its RoTE to 15%-16% from 17.5% in 2024. However, the underlying dynamics of the guidance from all banks is similar:
- Net interest income from U.K. balance sheets should grow from the continued reinvestment of structural hedges;
- The decline in global policy rates will pressurize foreign-currency balance sheets;
- The industry expects tight discipline in operating expenses; and
- We anticipate an uptick in credit costs from a subdued but normalizing credit environment.
Banks such as Barclays (RoTE of more than 11%) and Standard Chartered (RoTE progressing toward 13% in 2026) point to widening underlying profitability in 2025 when adjusting positively for one-off costs relating to strategy or litigation. Guidance from HSBC (RoTE in the mid-teens for 2025-2027) and NatWest (15%-16%) still points to materially higher returns than before the pandemic.
Other positives are tempered balance-sheet and risk-weighted asset growth and the favorable impact of the delay in the U.K.'s implementation of Basel 3.1. We therefore expect another year of material excess capital generation for U.K. banks, with the majority of this going toward a progressive rise in shareholder distributions.
Related Research
- U.K. Banking Outlook 2025: Entering The Year With Solid Earnings, Jan. 20, 2025
- U.K. Economic Outlook 2025: Monetary Policy And Trade To Offset Fiscal Impetus, Nov. 26, 2024
- Santander UK's Motor Finance Provision Indicates The Size Of U.K. Lenders' Potential Redress Payments, Nov. 20, 2024
- Court's Motor Finance Judgment Gives Some U.K. Banks Pause In A Strong Third Quarter, Oct. 29, 2024
- Banking Industry Country Risk Assessment: United Kingdom, Oct. 23, 2024
- United Kingdom 'AA/A-1+' Ratings Affirmed; Outlook Stable, Oct. 18, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | William Edwards, London + 44 20 7176 3359; william.edwards@spglobal.com |
| Secondary Contact: | Richard Barnes, London + 44 20 7176 7227; richard.barnes@spglobal.com |
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