UK banks poised for strong 2024 despite margin squeeze

UK banks poised for strong 2024 despite margin squeeze

UK banks are expected to see a better 2024 thanks to stronger credit conditions and reduced pressure on margins.

UK banks are positioned for robust earnings in 2024 as credit conditions hold strong and margin pressures continue easing, according to a new report by S&P Global Ratings. The major lenders' solid capital, funding and liquidity metrics will keep supporting credit ratings amid a shifting rate environment.

While higher interest rates initially provided a profit boost to UK banks, fierce competition for deposits and mortgages has now turned them into a burden weighing on net interest income - a key profitability gauge.

As rates rose, banks battled to attract deposits by offering higher savings rates to customers. At the same time, competition in the mortgage market meant lenders faced pressure to keep rates low. This squeeze on margins from both sides will exacerbate in 2024.
However, S&P expects this to only slightly dent earnings for the eight largest UK banks, with average return on tangible equity dipping to 13% from recent cyclical highs.

The credit ratings agency believes major lenders' strong capital buffers and steady credit conditions will help profits remain at healthy levels. Cost control will also be critical to defend margins.

While higher debt servicing costs and anaemic economic growth may strain borrowers and impact asset quality, S&P forecasts total credit losses holding near the historical average of around 30 basis points of total loans.

UK banks built sizable provisions during the pandemic to absorb future bad debts. Prudent underwriting over the past decade also means lenders entered 2024 with benign credit metrics.

Nonetheless, S&P sees downside risks to its base case projections for impairments. Any sharp downturn or recession would quickly feed through to credit performance.

One earnings tailwind on the horizon will be rising yields on banks' structural hedges starting in the second half of 2024. These instruments are used to protect lenders against interest rate volatility.

As expectations grow that the Bank of England may start cutting rates from mid-2024, higher hedging returns will help offset some of the margin impacts. However, fierce competition for retail deposits still poses risks.

Banks are aggressively competing for consumer cash as deposits shift between savings accounts to chase higher rates. Regulatory scrutiny on capital requirements also remains high.

While recent inflation data provides some optimism, S&P notes demand for corporate loans remains constrained by lacklustre GDP growth, subdued investment and weak consumption.

Overall, UK banks seem well positioned to weather margin pressures and deliver solid bottom line results in 2024. But downside economic and geopolitical risks mean earnings face challenges if the operating environment deteriorates.

Analyst ratings for Barclays, Lloyds, HSBC and NatWest

Refinitiv data shows a consensus analyst rating of ‘buy’ for Barclays PLC and between ‘buy and hold’ for Lloyds Banking Group PLC, HSBC Holdings PLC (LSE) and NatWest Group PLC.

Mean of estimates for Barclays suggest a long-term price target of 209.71 pence for the share, roughly 48% higher than the current price, 57.57p for Lloyds (+38%), 775.23p for HSBC (+27%) and 278.67p per share for Natwest, circa 34% higher than the current price (as of 13 February 2024).

Year-to-date performance by Barclays, Lloyds, HSBC and NatWest

With falling interest rates pencilled in for this year, UK banks kicked off the year with their share prices dragging the FTSE 100 down as investors expect bank profits to decline.

Technical outlook on the Barclays share price

The Barclays share price is being supported by its October-to-February uptrend line at 141.10p, a fall through which would likely lead to the December-to-January lows at 138.40p to 136.50p being revisited and perhaps even the October low at 128.12p.

Barclays Daily Candlestick Chart

For the October uptrend to resume, the early February high at 152.00p would need to be overcome.

Technical analysis on the Lloyds share price

The Lloyds share price trades in near four-month lows with the October trough at 39.42p representing the next possible downside target ahead of the 38.505p October 2022 low.

Lloyds Daily Candlestick Chart

For the Lloyds share price to head back up towards its 48.375p late December high, a rise above the late January high and 200-day simple moving average (SMA) at 43.875p to 43.885p would need to be seen.

Technical view on the HSBC share price

The HSBC share price is expected to remain within its 643.2p to 581.7p October-to-February sideways trading range. The October, November and January lows at 582.6p to 581.7p are expected to once again act as strong support, were this area to be revisited.

HSBC Daily Candlestick Chart

For a longer-term uptrend to be seen, a rise and daily chart close above the 643.2p early January high would need to be witnessed.

Technical analysis on the Natwest share price

The Natwest share price trades close to its 203.1p January low, a slip through which would put the psychological 200p mark back on the plate. Around it the bank’s share price is likely to find support, though, together with the mid-November low at 194.45p.

Natwest Daily Candlestick Chart

For the Natwest share price to resume its October-to-February ascent, its late January high and the 200-day simple moving average (SMA) at 229.1p to 229.5p will need to be exceeded.