A motor finance battle, hefty impairment charges and the shadow of 2008 all cast over banks third-quarter results but beneath the fog investors are rewarding the FTSE 100’s top lenders for another bumper quarter.
The FTSE 350 banks index has risen nearly four per cent this month and is up 17 per cent for the year-to-date.
It hasn’t all been plain sailing for London’s top lenders. HSBC and Lloyds both missed analyst profit expectations in the third quarter and Barclays only narrowly hit the mark.
Natwest and Standard Chartered, however, breezed past estimates with the former recording its highest quarterly profit since before its tax-payer bailout in 2008.
The FTSE 100’s ‘Big Five Banks’ recorded a combined £12.3bn pre-tax profit in the three months to September. This fell just short of the £12.8bn in the second quarter, which was prevented from beating its 2024 comparison after HSBC’s £1.58bn write-down.
Despite this, all five banks have enjoyed a share surge after releasing their latest financials.
Peter Rothwell, head of banking at KPMG UK, said: “This quarter has had its share of headline challenges… but if you look through the noise, the underlying picture for the major UK banks has been cautiously constructive”.
Wealth and high interest rates pay off
Whilst interest rates have tumbled from the post-financial crisis high of 5.25 per cent hit in August 2023 and not reduced til a year later, banks’ interest income remained sturdy.
Natwest’s net interest income was up 13 per cent year-on-year to £9.4bn. The bank’s net interest margin – a key measure of its profitability from lending – swelled by five basis points to 2.64 per cent.
Meanwhile Lloyds’ net interest income (NII) rose six per cent to £10.1bn with higher average interest-earning assets of £460.4bn.
The Bank of England has slashed rates five times to four per cent with Wall Street giant Goldman Sachs pencilling in another cut for next week.
But Lloyds, Barclays and Natwest still each raised their income targets for the full-year.
Lloyds has pencilled in net interest income at £13.6bn – an albeit modest increase from £13.5bn. Barclays has eyed NII “greater than £12.6bn”.
Natwest expects full-year income to come in at £16.3bn, up from £16bn at half-year results and around £15.7bn prior.
Russ Mould, investment director at AJ Bell, said: “[Natwest’s] traditional lending activities – in both the mortgage and corporate market – helped the company to beat quarterly profit forecasts by an eye-catching amount and have seen guidance for the full year on income and returns nudged higher.”
The firm’s retail banking arm delivered an operating profit of £850m, which was driven by £1.7bn lending growth in mortgages.
For HSBC and Standard Chartered, wealth was once again the stand out as the Asian-focused banks beefed up their divisions catered to high earners.
HSBC’s wealth fee income in Hong Kong grew 61 per cent to $646m after a bump in insurance and investment. This helped the bank shrug off the overhang from the Madoff fraud scandal, which put the lender on the hook for $1.1bn.
Standard Chartered’s wealth revenue soared 27 per cent to $890m in the quarter.
Beyond the “distractions” credit quality remained “resilient” whilst “investments in wealth continued to bear fruit, and the ‘higher for longer’ interest-rate environment continued to support net interest income,” Rothwell said.
Cost-cutting overhauls gather pace
The quarter came as Britain’s top banking chiefs plough ahead with cost-cutting overhauls to tighten the pockets of their respective lenders.
Rothwell said: “Cost discipline remains a key part of bank strategy, and the results are starting to reflect that.”
Georges Elhedery – who took the helm of HSBC in October 2024 – has laid out an ambitious plan to save $1.5bn by 2026.
The bank has locked its sights on Asia and the Middle East for this growth and culled operations across Europe as part of the overhaul.
Finance boss Pam Kaur re-affirmed the UK as one of the bank’s “home markets” following the results release and said the lender was “participating in the economic growth of specific sectors in the UK”.
Pre-tax profit at HSBC’s ring-fenced UK bank fell to £1.8bn from just over £1.9bn in the second quarter.
HSBC chief Georges Elhedery has turned to the East for growth
Another bank looking to the Middle East is Barclays, where chief CS Venkatkrishnan – known as Venkat – said the bank would restart operations in Saudi Arabia after 11 years.
Venkat has laid out his own plans for a strategic cost-saving endeavour, where he targets return on tangible equity – a crucial profit metric – in excess of 12 per cent.
The bank is also looking to return over £10bn to shareholders by 2026 – a goal the bank took bolder steps to meet with the launch of a £500m buyback in the third quarter.
Barclays also said it would shift to a quarterly buyback as part of its bid to ramp up customer returns.
Lenders have formed tie-ups with tech giants in the last year to ramp up cost-saving efforts.
Natwest and OpenAI sealed a partnership to enhance the bank’s digital assistants, whilst Lloyds has sent batches of top bankers to Cambridge University for AI training.
“Whilst it’s still early days for the full benefit of tech and AI investments to flow through, the signs are increasingly positive,” Rothwell said.
Tax, motor and fraud
But the noise around the quarter was still enough to spike some nerves across the City.
The motor finance redress scheme brought forward by the Financial Conduct Authority (FCA) has led to fierce opposition from the banking industry, which has begrudgingly upped provisions.
Barclays near-quadruped its funds set aside to £300m whilst Lloyds – the owner of the country’s largest motor finance lender – has hiked provisions to £2bn.
Spanish-headquartered lender and high street banking giant Santander has also taken a swing at the watchdog urging the government to intervene as it scrapped its UK third quarter results.
Still, Lloyds shares closed near a 17-year high at 85.46p the day it released its third-quarter results – even after warning the FCA’s redress could wipe 20 years of profitability off the car finance industry.
The City regulator has also appeared to stick to its lane on the redress scheme with a statement following Santander’s update saying: “Alternatives would cost more and take longer. It’s vital we draw a line under the issue so a trusted motor finance market can continue to serve millions of families every year.”
Rothwell said: “Banks will need to continue to monitor the residual exposure, provisioning adequacy, and the impact on customer behaviour and lending volumes.”
Motor finance lenders have lashed out at the City watchdog
Whilst HSBC is not exposed to the car finance market, the bank had its second consecutive quarter of scandal after it was forced to make a $1.1bn provision for the Madoff fraud scandal.
It followed a Luxembourg court rejecting the bank’s appeal against a Cayman Islands-based feeder fund that accused it of claiming restitution of securities lost in the investment fraud saga.
But the move was barely a blip on the bank’s share price radar, with its third-quarter results reversing losses that came the day prior when the provision was made and making further gains.
HSBC’s finance boss did confirm the bank was closely monitoring the private credit market, which has spooked global markets in the last month.
Barclays made a £110m “single name” credit impairment charge in its investment banking arm related to Barclays’ exposure to Tricolor – a US auto-dealership which sent jitters through the private credit market after its collapse due to loan-defaults.
Earlier this month, the FTSE 100 suffered its worst session since April’s tariff chaos after US jitters spread to the UK.
Shares in Barclays fell by as much as 6.75 per cent on Friday morning, before paring back some of those losses to end the day down 4.3 per cent. The stock prices for Lloyds, HSBC and Standard Chartered all fell by at least 2.5 per cent.
Whilst top lenders have said they remain on high alert – with America’s most influential banker Jamie Dimon warning of “cockroaches” in the market – shares quickly recovered after the brief dip.
A major blow for the UK banking scene may come on November 26 when Chancellor Rachel Reeves delivers her second Budget.
Banks have been in the hot seat for a potential tax raid or a hike to the surcharge that sits on top of lender’s corporation tax.
The bank levy sits at three per cent but reports have suggested it could be increased to five per cent – effectively setting the lender’s corporation tax at 30 per cent.
In August, Natwest lost five per cent as speculation of a bank tax raid ramped up.
Over £8bn in value was wiped off the City market after banking giants shares plunged.
Ruth Gregory, deputy chief UK economist at Capital Economics, said: “We suspect households and banks will bear the brunt of higher taxes.”
Capital Economics ranked a hike to the bank’s surcharge and levy on the lender’s quantitative easing profits as the two most likely tax rises in the Autumn Budget.