UK banks set to report lower earnings after bumper 2023

The UK's largest high street banks, including Lloyds, Barclays and NatWest, are expected to report a decrease in profits for the start of the year, following a prosperous 2023 where earnings peaked due to soaring borrowing costs.

These banking giants will be revealing their first-quarter financial results on Wednesday, Thursday and Friday respectively.

Last year, the banking sector was boosted by UK interest rates reaching their highest level in over a decade, resulting in lenders profiting from the increased cost of borrowing, particularly mortgages.

Lloyds and HSBC were among the banks that reported record-high annual profits for 2023.

However, earnings are predicted to have slowed as these high street behemoths experience changes in customer behaviour, such as more people depositing their money into savings accounts with higher returns.

Lloyds is anticipated to report a profit of £1.7 billion for the first three months of the year, a decline from the £2.3 billion reported during the same period last year.

Investors will be keenly observing the banks' net interest margins, which illustrate the difference between what they earn from loans and what they pay out for deposits.

They will also be monitoring any potential increase in customers falling behind on their loan repayments during the latest period, or any other indications of consumers facing financial difficulties.

For Lloyds, the net interest margin is expected to have slightly decreased since last year from 3.22 percent to 2.93 percent.

Matt Britzman, equity analyst at Hargreaves Lansdown, commented: "While the drop is expected and owes a great deal to being compared to the particularly strong environment this time last year, when rates were being hiked, anything lower than 2.90 percent would likely be punished."

Lloyds Banking Group is also bracing for scrutiny over its car finance arm Black Horse's involvement in the sector.

Earlier this year, Lloyds disclosed it had earmarked around £450 million to cover potential costs from a significant Financial Conduct Authority (FCA) probe into possible overcharging in car loans, which could lead to consumer compensation.

Analysts anticipate Lloyds may provide an update on whether the forecasted costs from this inquiry have shifted, with Mr Britzman labelling the matter as the "biggest question mark" looming over the banking conglomerate.

In other news, NatWest is poised to announce an operating pre-tax profit of £1.2 billion, a decrease from the £1.8 billion quarterly profit seen last year.

With Paul Thwaite now leading as chief executive and Rick Haythornthwaite recently assuming the role of chairman, NatWest Group ushers in a new era following a tumultuous period that included the exit of former CEO Dame Alison Rose after the debanking controversy involving the alleged unfair treatment of Nigel Farage.

"NatWest was one of the first to see a big shift from consumers into longer-term savings accounts, which was a surprise toward the end of last year," Mr Britzman remarked.

"Trends here seem to have stabilised, but it's certainly something to keep an eye on as those longer-term accounts are less profitable for banks."

Barclays is expected to announce a pre-tax profit of £2.2 billion for the first quarter, a decrease from the £2.6 billion reported in the previous year.

In February, Barclays delivered some positive news to its shareholders, revealing plans to save around £1 billion by enhancing efficiency this year, with a goal to achieve approximately £2 billion in savings by 2026.

These cost-saving measures coincide with a strategic overhaul that will reduce the focus on its substantial investment banking division.

After a year marked by volatility in financial markets and persistent economic uncertainty, which has impacted global investment banks, investors are eager for encouraging updates from the sector.