The UK's largest high street banks, including Lloyds, Barclays and NatWest, are predicted to report a decrease in profits for the start of the year, following a bumper 2023 where earnings reached an all-time high due to soaring borrowing costs.
These banking giants will be revealing their financial results for the first quarter on Wednesday, Thursday and Friday respectively. Last year, the banking sector was boosted by UK interest rates reaching their highest level in over a decade, resulting in lenders profiting from the increased cost of borrowing, particularly mortgages.
Lloyds and HSBC were among the banks that reported record-breaking annual profits for 2023. However, it is expected that earnings have slowed down as these high street giants experience changes in customer behaviour, such as more people depositing their money into savings accounts with higher returns.
Lloyds is anticipated to report a profit of £1.7billion for the first three months of the year, a decrease from the £2.3billion reported during the same period last year. Investors will be keenly observing the banks' net interest margins, which indicate the difference between what they earn from loans and what they pay out for deposits.
They will also be monitoring any potential increase in customers falling behind on their loan repayments during the latest period, or any other indications of consumers facing financial difficulties. For Lloyds, the net interest margin is expected to have slightly decreased since last year from 3.22% to 2.93%.
Matt Britzman, an equity analyst at Hargreaves Lansdown, remarked: "While the drop is expected and owes a great deal to being compared to the particularly strong environment this time last year, when rates were being hiked, anything lower than 2.9% would likely be punished."
Lloyds Banking Group is also in the limelight due to its car finance arm, Black Horse. Earlier in the year, Lloyds disclosed it had earmarked around £450million for potential costs arising from a Financial Conduct Authority (FCA) probe into possible overcharging on car loans, which could lead to compensation claims.
There's anticipation for Lloyds to provide an update on whether the anticipated costs from this inquiry have shifted, with Britzman labelling the matter as the "biggest question mark" looming over the banking conglomerate.
NatWest is poised to announce an operating pre-tax profit of £1.2billion, a decrease from the £1.8 billion quarterly profit seen last year. With Paul Thwaite now leading as chief executive and Rick Haythornthwaite recently taking over as chairman, NatWest Group is embarking on a new era following a challenging year that included the exit of former CEO Dame Alison Rose amid the debanking controversy triggered by ex-UKIP leader Nigel Farage.
"NatWest was one of the first to see a big shift from consumers into longer-term savings accounts, which was a surprise toward the end of last year," Mr Britzman observed. "Trends here seem to have stabilised, but it's certainly something to keep an eye on as those longer-term accounts are less profitable for banks."
Barclays is expected to announce a pre-tax profit of £2.2billion for the first quarter, a dip from the £2.6billion reported in the previous year. Barclays revealed in February that it plans to slash around £1billion in costs this year by boosting efficiency, with a goal of achieving approximately £2billion in total savings by 2026.
The cost-cutting plans are in tandem with an overhaul that will see it put less emphasis on its weighty investment banking arm. Investors will be keen for some upbeat news from the division, especially after a rocky year for financial markets and persistent economic uncertainty that has been challenging for global investment banks.