U.K. banks are expected to announce higher dividends as they report strong earnings for 2022 over the next few weeks.

Payouts at the country's five largest banks by assets — Barclays PLC, HSBC Holdings PLC, Lloyds Banking Group PLC, NatWest Group PLC and Standard Chartered PLC — are set to increase year over year, continuing their recovery from COVID-19 pandemic lows, S&P Capital IQ consensus estimates show.

Distributions should improve "meaningfully" as banks are expected to return 17% of their market cap to shareholders over the next 12 months, with that percentage rising to 25% over the next 24 months, Credit Suisse equity analyst Omar Keenan said in a Jan. 18 note.

The positive outlook is based on expectations for higher earnings in 2022 and the following two years thanks to longer-lasting tailwinds from higher rates, which will offset rising costs and impairment charges amid a weaker economy, according to analysts.

Net income and revenue are projected to rise each year through 2024 at all five banks, analyst estimates show.

Banks should book strong revenue growth in 2023 just from having enjoyed the benefit of higher rates for a full year, James Invine, equity analyst at Société Générale Cross Asset Research, said in a Jan. 6 note.

The Bank of England has raised its base rate to 4% from 0.25% in a little over a year. The market expects the Bank of England rate to increase to 4.75% in 2023, Invine said.

Revenue growth in the following years will be driven by gains from structural hedges banks have put in place to protect their balance sheets from short-term interest rate volatility, as well as the repricing spread between loans and deposits, Invine said.

* Access aggregate financial highlights for U.K. banks on CapIQPro. * Access Peer Analysis Excel template on CapIQPro.

"So far, the banks have passed 28% of rate rises on to interest-bearing deposits and 85% to variable rate loans," the analyst noted. Invine estimated that structural hedges could add up to £8 billion each to the annual revenue of Barclays, NatWest and Lloyds.

Net interest income, the key driver of revenues, is set to grow at all five banks in 2023 and 2024, analyst estimates show.

Bank revenues and asset quality are expected to remain resilient in 2023 despite the expected recession and ongoing cost of living crisis, Vitaline Yeterian, senior vice president in the global financial institutions team at DBRS Morningstar, said in an interview.

Loan growth will slow this year, but the still-low unemployment rate and the initial net interest income boost from central bank rate hikes are strong mitigating factors, Yeterian said.

Loan loss provisions at the five banks are set to rise more notably in 2023 from 2022, but the increase should moderate in 2024, according to current analyst estimates. The market consensus for the banks' provisions in the years 2023 to 2025 already factors in a mild recession, Credit Suisse's Keenan said.