U.K. banks are forecast to navigate a worsening economic environment and achieve higher profits in 2023, according to S&P Global Ratings.

The rating agency's base case scenario for 2023 is one of moderate growth in the sector's earnings as higher net interest income, or NII, exceeds rising operating costs and impairment charges. The NII surge seen in 2022 will continue through 2024 but at a slowing rate, Ratings said, noting that the major U.K. banks have passed on a relatively small portion of interest rate raises to depositors so far.

Analysts are also optimistic about banks' fortunes for the year ahead. Mean consensus estimates gathered by S&P Capital IQ point to improving return on equity at almost all the major U.K. lenders over the next two years.

The U.K. is set to be one of the weaker global economies this year, with Ratings forecasting a 1% real GDP contraction. The growing pressure on borrowers is expected to prompt an increase in loan forbearance and weigh on banks' asset quality, it said.

Barclays PLC, HSBC Holdings PLC, NatWest Group PLC and Lloyds Banking Group PLC ramped up provisions for bad loans in the third quarter. Lenders cited falling house prices, rising unemployment and weaker economic growth as reasons for adjusting macroeconomic assumptions in their provisioning models.

Banks will likely continue to build up provisions in the coming quarters, Ratings said. Impairment charges are projected to be moderately above the pre-pandemic average of about 30 basis points, and the agency believes banks are well positioned to avoid a material rise in credit losses. Unemployment will likely remain relatively low even in an adverse scenario, it said.

U.K. banks should also be able to maintain stable levels of regulatory capital and leverage. Lenders' capital management plans likely take into account the effects of an increase in the countercyclical capital buffer to 2% in July and the results of the latest stress test in the summer, Ratings said.