Big UK banks are expected to maintain strong lending income and margins while navigating rate cuts likely to happen in the coming quarters.

Net interest income (NII) in 2024 and 2025 at four of the country's five largest banks — Barclays PLC, Lloyds Banking Group PLC, NatWest Group PLC and Standard Chartered PLC — is set to remain at similar levels to those seen in 2023, analyst consensus estimates compiled by S&P Global Market Intelligence show. HSBC Holdings PLC's NII is forecast to drop from 2023 but remain above 2022 levels. NII is the difference between interest revenues and interest expenses.

NII surged in 2023 amid rapid monetary tightening by the Bank of England (BoE) and other major central banks, which stepped up efforts to fight inflation. With the rate cycle largely considered to have peaked, markets project rate cuts to begin this year, with further reductions in 2025. On March 11, UBS economists forecast three BoE rate cuts totaling 75 basis points in 2024, likely to start in August.

While looser monetary policy would be a headwind for banks' interest earnings, there are also tailwinds that would further drive NII and net interest margins (NIMs), including income from banks' structural hedges, which contain liabilities less sensitive to short-term rate volatility. Deposit repricing, which hit NIMs in the second half of 2023 as many customers moved to higher-rate products, is expected to slow down during 2024, supporting margins and banks' overall earnings.

In a March 6 report, S&P Global Ratings forecast "another solid year" for UK banks with rate cuts coming down the pike. Guidance from several big banks suggests that performance will not be quite as strong as it was last year but "still robust" in 2024, Ratings said.

A tale of two halves

UK banks have generally guided for weaker NII and NIM dynamics in the first half of 2024 with an expected recovery later in the year as structural hedge tailwinds kick in and deposit and mortgage pricing pressures ease.

"[W]e are seeing early signs of improving mortgage demand and deposit migration to higher-rate savings accounts has slowed, yet mortgage payments are likely to remain elevated this year as customers pay down debt before refinancing on to a higher rate," NatWest CEO John-Paul Thwaite said during a Feb. 16 earnings call.

Lloyds expects its average interest-earnings assets (AIEAs) to be above £450 billion and its NIM to be greater than 2.90% in 2024, a marginal decline from £453 billion in AIEAs and a 3.11% NIM in 2023. Structural hedge income will offset some of the mortgage repricing and deposit churn, which are "expected to ease throughout 2024," CFO William Chalmers said during a Feb. 22 earnings call.

Lloyds' NIM "is likely to stabilize and expand from the middle of 2024" Berenberg analysts said in a Feb. 23 research note.

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Barclays CFO Anna Cross cited similar deposit and mortgage dynamics during the group's Feb. 20 investor update, saying Barclays expects "to start growing the balance sheet again ... towards the back end of the year."

The outlook of Asia-focused HSBC and Standard Chartered was not much different than that of UK-focused peers, with both flagging hedge refinancing at higher yields and balance sheet growth as key drivers for NII, while deposit migration in key markets, especially Hong Kong, remains a drag.

NIM outlook

Analysts expect UK bank NIMs to follow a similar trajectory to NII by falling in 2024 and recovering in 2025, estimates data compiled by Market Intelligence shows.

Recent market data supports expectations for easing deposit and mortgage headwinds on banks' NII and NIMs, with smaller outflows, robust volumes and a more stable asset mix recorded on the deposit side in January, while net approvals and completion spreads increased on the mortgage side, Bank of America said in a Feb. 29 report.

"We anticipate some further deposit migration and [mortgage] spread compression but recent performance reinforces our view that company guidance for UK retail and commercial banking income has been set conservatively," analysts Alastair Ryan and Rohith Chandra-Rajan said.

The timing and size of rate cuts, which could shift guidance, remain uncertain as they largely depend on how quickly inflation reaches the BoE target. The central bank in its Feb. 1 policy meeting said it will "keep interest rates high for long enough to get inflation back to the 2% target in a lasting way."