Lloyds, HSBC, Barclays and Natwest post record £44bn profits from global interest rate hikes

The UK’s biggest banks notched their highest combined annual profits ever last year as interest rate hikes around the world gave lenders gaping margins.

A City A.M. analysis of company reports shows Britain’s Big Four banks – Lloyds, HSBC, Barclays and Natwest – together posted around £44.2bn in pretax profit last year, up 41 per cent from £31.4bn in 2022.

HSBC led the pack, seeing a 78 per cent boost in annual profits to $30.3bn (£24bn) and announcing a fresh $2bn share buyback.

The Asia-focused giant helped the banking sector to become the UK’s biggest dividend-payer last year after dishing out £8.4bn to shareholders.

Analysts had expected the Big Four’s combined profits to come in at roughly £46.6bn. HSBC’s profit undershot analysts’ estimates of $34.1bn (£27.2bn) due to a surprise $3bn write-down on the group’s holding in a Chinese bank.

The news triggered the bank’s biggest one-day share drop since the financial crisis.

Lloyds, Britain’s largest domestic lender, posted a 57 per cent jump in profits to £7.5bn and reported a fall in loan loss impairments. The group set aside £450m for an FCA probe into now-banned motor finance commission arrangements.

Analysts estimate the auto lending industry could be on the hook for up to £16bn in compensation payouts from the review. RBC estimates Lloyds could take an up to £2bn hit, with Close Brothers, Santander and Barclays also exposed to lesser degrees.

Natwest posted a profit of £6.2bn and appointed a new permanent CEO after a “debanking” row with former Ukip leader Nigel Farage forced then boss Dame Alison Rose to resign last July. The scandal has weighed heavily on the bank’s share price and public image.

Meanwhile, Barclays was the only one of the five not to post annual profit growth. The bank saw profits of £6.6bn in 2023, down from £7bn in 2022, as it was hit by £927m in costs tied to a major restructuring designed to return at least £10bn shareholders by 2026.

The Big Four have announced plans for roughly £5.6bn in new share buybacks to reward investors

Banks’ record profits have been driven by a jump in net interest income (NII) – the difference between what a bank pays out in interest to savers and receives in interest from loans – as central banks around the world hiked borrowing costs to cool inflation.

The Bank of England raised the base rate 14 times in a row between December 2021 and August 2023 before holding it at a 16-year high of 5.25 per cent.

The Big Four raked in around £65.5bn in NII last year, up 10 per cent from £59.3bn in 2022.

Despite the bumper profits, UK banking stocks have floundered due to economic uncertainty, bad public images and unattractive forecasts.

Banks’ net interest margins narrowed between the third and final quarters of 2023 as they face pressure to offer savers’ better deals and the central bank is expected to start cutting rates in June. Mortgage rates are also coming down as lenders compete for business in a smaller market.

Analysts predict that banks’ combined profits have now peaked and will be largely flat or fall over the next two years.

Peter Rothwell, head of banking at KPMG UK, told City A.M.: “The results paint 2023 as a bumper year for the majority of banks. But it’s likely that the sector has reached a profitability peak as the tailwinds of higher rates recede.

“With impairments on the rise, as the cost of living continues to bite into consumers’ pockets and the UK economy struggles to grow, lenders are facing into an increasingly uncertain outlook. We may see the boom time slowing in the next reporting cycle.”