Snapshot of Q4 bank results Bank fortunes improve as interest rates rise

UK bank results will start this week. NatWest will be the first of Britain’s big banks to come under the microscope, as HSBC, Britain’s biggest bank, Lloyds and Barclays report next week.

The results come as the banking sector has had a strong start to 2022. The FTSE 350 banking sector is up 15% so far this year, outperforming the wider market. The FTSE 100 rose just 1.5% over the same period. Looking at the sector’s performance since December, the banking sector is trading down 20% against a 6.5% rise in the FTSE100.

The sharp rise in the stock price has come since the BoE began raising interest rates in December, followed quickly by another hike in February. The higher interest rate environment, along with expectations of further rate hikes to come and a rebound in loan demand should keep major UK lenders buoyant and optimistic in outlook.

The Big Four are expected to report total profits of £34billion, with Lloyds and Barclays planning to report their highest earnings in decades.

Here’s what to look out for:

Net interest income

Overall, banks should show signs of improving earnings, thanks to rising net interest income. Higher interest rates mean higher borrowing costs, widening the gap between what banks pay depositors and how much they charge borrowers.

Demand for loans is expected to be strong as the strong recovery from the COVID crisis means customers are confident enough to take on debt and spend well, helping to generate strong income for UK banks. The UK labor market is strong and the UK economy recorded robust growth of 1% quarter-on-quarter in the fourth quarter. The housing market has remained strong which will support high street lenders such as Lloyds.

Reserves for loan losses

The release of reserves, set aside for bad debts that never materialized during the pandemic, has been released throughout the past year, boosting bank profits. The release of these bad debt reserves is not expected to continue in 2022.

Costs

Costs will be more targeted than usual as UK inflation hit a 30-year high of 5.1% in December. Everything from the cost of paper to wages has gone up. The costs of IT upgrades and digitization could be a focus.

Share buybacks and dividends

The removal of restrictions preventing UK banks from distributing capital distributions is also positive for banks. During the pandemic, the BoE imposed restrictions on the repayment capacity of banks in order to protect their capital. With this restriction no longer in place, the focus will be firmly on dividends and share buyback programs.

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