Major UK Banks Face Q3 Earnings Test

Three of the UK's largest banks are set to report earnings this week amid concerns about credit losses, the impending Budget, and a weak London stock market.

Major Banks Reporting

• Barclays reported profits of £1.46 billion, in line with expectations, putting money aside for car loans and announcing a £500 million stock buyback
• Lloyds' profit is anticipated to halve to £726 million amid the impact of the auto finance scandal, as investors look to see how it will affect the bank's outlook.
• NatWest is projected to have essentially unchanged profits of £1.34 billion as investors look for clues about whether the bank will increase dividends or try for more M&A.

UK Banks Solid Despite Circumstances

Ahead of UK banks reporting third-quarter earnings, shares in banks dipped globally amid concerns about US bad loans. While the inciting incident was limited to two regional banks in the US following the bankruptcy of auto-related firms, it sparked generalised concerns about risk management and rising bad loans at institutions. UK bank shares dropped in what was seen as a knee-jerk reaction, only to recover, as analysts note that bank profits have risen in recent years. However, their success makes them vulnerable to another issue: the UK Budget. There are rumours that Chancellor Rachel Reeves may raise the bank tax surcharge from 3% to 5%. Additionally, underperformance of UK equities amid the sluggish economy could weigh on the banks' trading income.

Barclays Sets Tone for UK Banks

The first of the major banks reported on Wednesday, with earnings largely in line with expectations. Barclays' pretax profit declined to £2.1 billion from £2.2 billion a year earlier, with the costs of the auto finance scandal offsetting operational gains. Traders may use the results to gauge how other major UK banks will do this season. The bank increased its provisions for car loans to £325 million from £90 million a quarter earlier. But, despite the added costs, it still had enough cash to announce a £500 million stock buyback, thanks to increased cost efficiency savings. Barclays' net interest income also handily beat expectations at £3.75 billion compared to forecasts of £3.55 billion and raised its outlook for this item. It appears that UK banks can take advantage of the current interest rate environment to increase their income.

Lloyds Moves on From Motor Finance

According to estimates compiled by Lloyds, the bank is set to report a Q3 profit of £726 million, around half of the £1.41 billion reported in the prior quarter. That is mainly due to an expected £858 million remediation charge in the wake of the FCA's resolution on the auto finance scandal. Traders will be looking to see what further impact the scandal might have on the bank's profit projections, with guidance likely to be the focus of the report. In its interim report, Lloyds forecast underlying net interest income to be £13.5 billion this year.

NatWest Eyes M&A Field With Ample Cash

NatWest will report earnings on Friday and, according to the consensus it compiled, is anticipated to announce a Q3 net profit of £1.34 billion, practically the same as Q2's £1.33 billion. During the quarter, the UK government finally wound down its stake in the bank it had acquired during the subprime crisis. Analysts note that NatWest has accumulated significant cash reserves, which it could use for future acquisitions or pay back better dividends. Executive commentary on the bank's outlook could be the key to determining which track will be favoured.

Bottom Line

Barclays' in-line results provide a cautiously optimistic terrain for Lloyds and NatWest, with traders now turning to how the latter two will handle credit risks and capital allocation in their upcoming reports.