Barclays, NatWest cut 2023 outlook as UK banks face lending margin squeeze

Barclays PLC and NatWest Group PLC further downgraded their 2023 net interest margin guidance as rate headwinds hit margins across the largest UK banks in the third quarter.

Net interest margins (NIMs) — which measure banks' earnings on loans against spending on deposits — fell quarter over quarter at Barclays, HSBC Holdings PLC, Lloyds Banking Group PLC and NatWest, company filings show.

The sequential NIM decline marks a turn in earnings dynamics as the positive impact of higher central bank rates gives way to rate-related pressures. The slowdown of rate-driven earnings came sooner than expected, leading to consensus downgrades for Barclays and NatWest after their earnings releases in late October, S&P Global Market Intelligence data shows.

Both banks had already reduced their 2023 NIM goals in the second quarter.

2023 NIMs

Barclays and NatWest attributed the new NIM guidance cuts primarily to growing competition for deposits as more customers shifted balances to higher-yielding products in the third quarter. Barclays did not capture as much of the deposit flows as it expected in the quarter due to "intense competitive pricing," CFO Anna Cross said during an Oct. 24 earnings call. The bank no longer expects deposit balances to stabilize over the fourth quarter as rivalry between UK lenders kicks into a higher gear, the CFO said.

Barclays now expects NIM at its Barclays Bank UK PLC domestic arm to be in the range of 3.05% to 3.10% in 2023, compared to the projected 3.15% previously.

NatWest attracted more deposits in the third quarter, but beating competitors came at a cost as the increased shift to term deposits weighed down on NIM, CEO Paul Thwaite and CFO Katie Murray said on an Oct. 27 earnings call. The bank has made the deliberate decision to support long-term growth by expanding its deposit franchise which means operating at tighter margins in the near term, the executives said.

NatWest downgraded its full-year guidance to a NIM greater than 3.0%, having previously targeted 3.15%.

The bank booked the strongest deposit volume rise in the quarter, with Lloyds Banking Group also booking a small increase and Barclays UK and HSBC reporting declines.

Lloyds Banking Group maintained its NIM guidance of 3.10% in 2023 but said it expects the margin to weaken further in the fourth quarter. Its NIM fell to 3.08% in the third quarter from 3.14% in the previous three-month period.

HSBC Holdings PLC does not provide a NIM guidance for its group or domestic banking business, but speaking at the group's Oct. 30 earnings call, CFO Georges Elhedery said deposit mix shifts will weigh on margins in the UK banking business. The bank expects deposit betas — which measure the change in deposit costs as a result of higher rates — to be "materially higher" than 50% going forward.

"[A]dditional rate hikes from here would be mostly for the benefit of our customers," Elhedery said.

Mid-term outlook

UK bank NIMs could take another hit if deposit migration accelerates through the end of the year, S&P Global Ratings said in an Oct. 30 commentary. Yet migration may slow down in late 2023 as the Bank of England seems to have paused rate hikes, the analysts said. The BoE has kept its base rate at 5.25% since September after raising the rate 14 consecutive times.

On a positive note, "higher structural hedge yields will increasingly underpin margins over 2024-2025 because banks will reinvest maturing positions at higher rates," the analysts noted. Margin pressures arising from mortgage refinancing are also expected to ease in the next 12 to 18 months, they said.

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NatWest sees NIM stabilizing sometime during 2024 thanks to expected higher yields from its structural hedge, its CFO Murray said. The timing of stabilization would depend on deposit and mortgage margin dynamics, and is more likely to happen in the second half of 2024, the CFO said.

Lloyds CFO Chalmers also said tailwinds from the bank's structural hedge — containing net liabilities that are stable or less sensitive to interest rate changes — will strengthen in the course of 2024, offsetting negative deposit and mortgage pricing effects.

Current mean consensus estimates project UK bank NIMs to decline in 2024 and improve somewhat in 2025 for all banks but HSBC, Market Intelligence data shows. Net interest income at all banks is seen falling in 2024 and bouncing back in 2025, the data shows.