UK bank earnings season kicks off with Barclays, Lloyds, and NatWest

​​​What to expect from Barclays earnings

Barclays is set to report its first-quarter (Q1) earnings on Wednesday 30 April, with analysts expecting a significant 23% year-on-year (YoY) increase in pre-tax profits to approximately £8.1 billion. This impressive growth is expected to be driven largely by strong performance in its US investment banking division.

​The bank has benefited from heightened market volatility, which typically boosts trading revenues for investment banks. Barclays' diversified business model, with significant operations outside the UK, has provided it with greater resilience compared to its more domestically-focused competitors.

​However, potential provisions related to the motor finance commission scandal could dampen some of this positive momentum. Analysts estimate Barclays may need to set aside around £442 million to cover potential claims, though this figure remains relatively modest compared to some of its peers.

Lloyds faces headwinds

​Lloyds, scheduled to release its Q1 results on Thursday 1 May, is projected to report a 6% decline in pre-tax profits to approximately £1.5 billion. As the UK's largest mortgage lender, Lloyds remains heavily exposed to the domestic economy and housing market.

​The bank is expected to significantly increase its provisions for potential loan defaults to £279 million, reflecting growing economic uncertainties. This cautious approach signals concerns about the UK economic outlook, even as inflation has begun to moderate and interest rates may be poised to decline later this year.

​Furthermore, Lloyds faces substantial exposure to the motor finance commission scandal, with potential liabilities estimated up to £4.6 billion. This figure dwarfs the provisions made by other banks and represents a significant risk to Lloyds' profitability and capital position in the coming years.

​Market watchers will be closely monitoring any comments from management regarding this issue, particularly in light of an upcoming Supreme Court ruling that could determine the scale of the bank's liability. The trading platform you choose can help you react quickly to these developments.

​NatWest returns to private ownership

​NatWest, reporting on Friday 2 May, is anticipated to show resilience with a expected 20% rise in pre-tax profits to £1.6 billion for Q1. This performance comes at a pivotal moment for the bank, as it prepares to return to full private ownership.

​This earnings report will be the final one before the UK government completes its divestment of the bank, marking the end of state ownership that began during the 2008 financial crisis. This milestone represents an important chapter in the UK banking sector's recovery from that tumultuous period.

​Despite the positive profit outlook, NatWest is planning to increase its provisions for bad debts by 81% to £169 million. This significant rise reflects concerns about the economic environment and potential stress in both consumer and corporate loan books.

​Additionally, reports suggest NatWest is considering a 25% increase in its bonus pool, potentially reaching £450 million. This move could attract scrutiny from shareholders and the public, particularly given the challenging economic conditions many customers are facing.

​Motor finance scandal casts a shadow

​The motor finance commission scandal continues to loom large over the UK banking sector, with significant implications for this earnings season. The issue revolves around potentially unfair commissions charged on car loans over many years.

​The Financial Conduct Authority (FCA) is investigating whether lenders failed to properly disclose commission arrangements, which could have led to customers paying higher interest rates than necessary. This bears similarities to the payment protection insurance (PPI) scandal that cost the industry billions in compensation.

​Lloyds appears most exposed, with estimates suggesting potential liabilities of up to £4.6 billion. Barclays has more modest exposure at around £442 million, while NatWest's potential liability figures remain less clear but are generally considered to be lower than its peers.

​A Supreme Court ruling expected later this year could significantly impact the scale of provisions needed. Banks are likely to take different approaches to provisioning during this earnings season, which could lead to notable differences in their reported profitability. If you're considering investing in these banks, understanding these potential liabilities is crucial.

​Interest rate environment and net interest margins

​The interest rate environment will be a key focus for investors during this earnings season. After a period of rising rates that benefited banks' net interest margins, expectations have shifted toward potential rate cuts later in 2024.

​Net interest margin (NIM) – the difference between what banks earn on loans and pay on deposits – has been a significant driver of profitability during the recent high interest rate environment. Any signs of compression in these margins would be a concern for investors.

​Barclays' diversified business model makes it less dependent on net interest income compared to Lloyds and NatWest. This diversification could provide greater resilience if interest rates begin to fall, potentially giving Barclays an advantage over its more domestically-focused competitors.

​Investors will be closely scrutinising management commentary on the interest rate outlook and how each bank plans to maintain profitability if rates decline. Banks that can successfully grow non-interest income streams may be better positioned to weather potential challenges ahead. Understanding these dynamics is essential when trading UK banks.

​Global economic uncertainties and loan loss provision

​All three banks are increasing their provisions for potential loan losses, reflecting growing concerns about economic uncertainties both domestically and globally. This cautious approach suggests that bank executives remain wary about the economic outlook.

​Lloyds is expected to set aside £279 million for potential loan defaults, while NatWest plans to increase its provisions by 81% to £169 million. These significant increases highlight concerns about potential stress in both consumer and corporate loan books as the economy navigates challenging conditions.

​Commercial real estate exposure will be a particular area of interest, as this sector has faced significant pressures due to changing work patterns and higher interest rates. Any signs of deterioration in commercial property loan books could prompt further increases in provisions.

​Geopolitical tensions, including ongoing conflicts in Ukraine and the Middle East, continue to create economic uncertainty that could impact loan performance. Barclays, with its more international exposure, may face different risk considerations compared to the more UK-focused Lloyds and NatWest. Spread betting and CFD trading can be used to take positions on these banks based on your outlook.

​How to trade UK bank stocks

1. ​Before trading UK bank stocks around earnings season, thorough research is essential. Analyse not just the headline numbers but also key metrics like net interest margins, loan loss provisions, and capital ratios to form a complete picture of each bank's performance.
2. ​Consider whether you want to trade or invest. If you're looking to capitalise on short-term price movements around earnings announcements, spread betting or CFD trading might be appropriate. For longer-term positions, consider share dealing through an IG Invest account.
3. ​Open an account with us by visiting our website and completing the application process. Our platform offers access to a wide range of markets, including all the major UK banks, with competitive spreads and excellent execution quality.
4. ​Search for the bank stocks you want to trade in our platform, place your trade, and manage your position with our suite of risk management tools. Remember that bank stocks can be volatile around earnings announcements, so consider your risk appetite carefully. 

Outlook for UK banking sector

​The outlook for the UK banking sector remains mixed as we head into this earnings season. While higher interest rates have boosted profitability in recent quarters, concerns about economic growth and potential loan losses are increasing.

​The motor finance scandal represents a significant unknown, with the potential to impact capital positions and dividend policies across the sector. Investors will be looking for greater clarity on the scale of potential liabilities and how banks plan to address them while maintaining shareholder returns.

​Regulatory changes and government policies will also play a role in shaping the sector's future. The return of NatWest to full private ownership marks an important milestone, but ongoing scrutiny of banking practices and executive compensation continues to influence investor sentiment.

​Despite these challenges, UK banks generally maintain strong capital positions, which should provide resilience against economic headwinds. Dividend yields remain attractive compared to many other sectors, potentially supporting share prices even if growth prospects moderate. ETF trading offers another way to gain exposure to the UK banking sector while diversifying risk.