The U.K.'s biggest banks can weather a weakening economic environment, supported by strong second-quarter revenues driven by rising rates, according to analysts.
Aggregate net interest income, or NII, at the country's four biggest banks — HSBC Holdings PLC, Barclays PLC, Lloyds Banking Group PLC and NatWest Group PLC — reached its highest level since the first quarter of 2020, S&P Global Market Intelligence data shows, due to multiple central bank rate hikes since December 2021.
NII is the difference between revenue generated from assets such as loans and expenses associated with deposits and other liabilities. When central bank rates rise, commercial banks can profit by passing on higher rates to borrowers.
Solid first-half profits, spurred by strong NII growth, and good financial flexibility position U.K. banks well amid a deteriorating economic picture, S&P Global Ratings said in an Aug. 10 report. Pretax profits for the biggest U.K. banks were not far below first-half 2021 results, which were themselves "exceptional" partly due to material loan loss provision releases, the report said. Its sample of banks also includes Standard Chartered PLC and Santander UK PLC.
The impact of cost of living pressures, due to inflation and higher interest rates, has not shown in the banks' results so far this year, DBRS Morningstar said in an Aug. 5 note.
HSBC recorded a 13.2% year-over-year increase in NII for the second quarter. Barclays, NatWest and Lloyds also saw a double-digit increase, with Lloyds' figure almost doubling.
Only HSBC actually registered a year-over-year increase in net attributable profit for the quarter. Its global operations benefited from rising interest rates across the world.
At Barclays, net attributable profit fell 44.8%, dented by £1.33 billion in litigation and conduct charges booked in the quarter, of which £1.15 billion related to the overissuance of securities and £165 million related to an anticipated monetary penalty from the U.S. Securities and Exchange Commission. Lloyds' attributable profit fell 34.3% after it set aside £377 million of loan loss provisions to cover potential defaults because of rising inflation and the cost of living crisis.
HSBC, Barclays, Lloyds and NatWest did not respond to requests for comment.
The four banks saw loan loss reserves decline in the second quarter compared with a year ago.
Their asset quality is expected to deteriorate given the weaker economic outlook and increasing insolvencies, DBRS said. But this is likely to be "manageable" given current strong profitability and the likelihood that banks will continue to see strong NII generation.
* Access the aggregate income statement for the U.K. banking sector.
* Access S&P data on asset quality, capital adequacy and liquidity.
