UK banks set for strong earnings in 2024 despite margin pressures, S&P says
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UK banks are set to see strong earnings in 2024, according to ratings agency S&P, on the back of robust credit fundamentals and easing margin pressures.
S&P Global Ratings said in a report on Thursday that banks’ capital, funding and liquidity metrics would continue to support its ratings.
The big players’ latest earnings suggested higher interest rates have gone from boon to burden as fierce competition for deposits and mortgages dragged on net interest income – a key measure of profitability reflecting the difference between what banks pay out and receive in interest.
“We expect tighter margins will cause UK banks’ robust earnings to dip only slightly in 2024, with the eight largest groups delivering an aggregate 13 per cent return on tangible equity,” said S&P credit analyst Richard Barnes.
“Although higher debt-servicing costs and weak economic growth will weigh on asset quality, we expect credit losses to stay close to the historical average of about 30 basis points of total loans.”
The agency said earnings should be “healthy”, albeit below those seen earlier in 2023 due to near-term margin pressures and a rise in credit loss charges.
It added that rising yields on lenders’ structural hedges would be important from the second half of 2024, when the Bank of England is expected to have started cutting interest rates.
Structural hedging is a risk management tool where banks use some assets to build a fixed-income cash flow that protects overall earnings from interest rate volatility. Analysts see the technique being a key tailwind for this and next year.
S&P noted that fierce competition in the deposits market could pose risks.
Domestically-focused banks have seen negative earnings revisions due to a mortgage slowdown, regulatory scrutiny and deposit shifting – where customers move excess funds out of current and instant access savings accounts to take advantage of higher interest rates.
Although latest inflation data has been positive, S&P noted that demand for loans is still constrained by weak GDP growth, consumption and investment.
“UK banks have started the year with generally benign credit conditions, due to prudent underwriting, low unemployment, falling inflation, and solid growth of wages and corporate earnings,” Barnes added.
“Nonetheless, we see more downside than upside to our base-case credit loss projections, and upcoming elections in the U.K. and elsewhere could bring added volatility,” added Mr. Barnes.