UK banks results roundup – are they undervalued?

If we look on a year-over-year basis, then broadly speaking there’s a positive trend in performance across major UK banks. As interest rates have risen throughout major economies, banks have been able to make higher returns on their traditional lending operations.

However, when we look at quarter-on-quarter performance, it paints a very different picture. It looks like central banks might have reached peak rates, or at least close to being there. That means the benefits from higher rates are expected to have capped off – and that’s showing through in the results.

Source: company financial statements, 03/11/23. Income includes interest income, non-interest income and other operating income where appropriate. Profit is represented by underlying profit before tax, in the case of HSBC ‘notable items’, which had a big impact on results in the comparable quarter last year, were added back to reported income and profit before tax.

This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Unlike the security offered by cash, investments and any income from them will rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future. Ratios also shouldn’t be looked at on their own.

Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.

Are we at peak net interest margins?

Net interest margin (NIM) is one way of measuring the profitability of banks’ lending/borrowing operations.

Traditional lenders like NatWest and Lloyds are slightly more beholden to the rate environment, and its impact on NIM, than some of their more diversified peers.

Banking net interest margin

Source: Company financial statements, 03/11/23.

We can see NIM peaking for most UK players earlier in the year. We’re now in a period of adjustment, where several factors are at play. One of the key concerns about the sector right now is where NIMs will settle into 2024.

View the latest NatWest share price and how to deal

Sign up to updates on NatWest

View the latest Lloyds share price and how to deal

Sign up for updates on Lloyds

Deposit trends – what to look for

With rates at levels savers haven’t seen for decades, competition is hotting up among the major banks to attract and keep deposits.

Current accounts that don’t pay any, or very little, interest are an incredibly cheap source of funding for banks. But consumers are acting, moving into products that aren’t quite as flexible, but with significantly better rates.

Change in current account balances over 2023

Source: company financial statements, 03/11/23.

We can see this trend playing out looking at current account balances for Lloyds and NatWest, and it’s bad news for NIMs.

We think there’s also an element of consumers being prudent – using cash to pay down debt given the higher-rate environment.

It’s not all bad news though. Both Lloyds and NatWest have been able to keep total deposit levels from falling materially year to date – with flows into savings products offsetting lost current account balances. But results from NatWest sent a little shock through the market, with the pace of these changes coming in hotter than many thought.

China remains a challenge

For HSBC and Standard Chartered, it’s Asia that’s really moving the dial.

Markets got a nasty surprise when Standard wrote down the value of its take in Bohai Bank by $700mn. Following a poor set of results from the Chinese bank, Standard took the pragmatic decision to reduce the value of its stake – taking a charge in the process.

The commercial real estate sector (CRE) in China is another challenge. Both Asian-focused banks took additional charges in preparation for loan defaults on their CRE portfolios, to the tune of a combined $700mn.

There have been some hopes that stimulus measures by the Chinese government would help rally demand for housing. For now though, consumers and investors are remaining cautious on property.

View the latest HSBC share price and how to deal

Sign up for updates on HSBC

View the latest Standard Chartered share price and how to deal

Sign up for updates on Standard Chartered

What’s next?

Guidance given from most companies reflected the fact NIMs look to have peaked, and it’s been a clear focus from investors with anyone showing weakness getting punished on the day. We saw NIM guidance downgrades from Barclays, NatWest and Standard Chartered.

There are a few things we’ll be watching from here.

First is the pace of deposits leaving current accounts. We think this could ease as those eager to grab new rates have already done so and everyone settles into the new rate environment.

We’ll also have one eye on the mortgage market, which hasn’t been touched on here, but has been acting as a drag on performance – something that could ease later in 2024.

There’s also the potential tailwind from the structural hedge, which should provide an income boost over the coming years.

Is a structural hedge the UK banks’ secret weapon?

We see reasons to be cautious over the short term. There’s still a lot of uncertainty in the air and things do look to have peaked in terms of NIMs. Default levels on loans are always a concern when rates move up so fast, but for now levels are staying in line with pre-pandemic trends – it’s certainly something to watch though.

However, the depressed valuations on offer are potentially overlooking some of the tailwinds we see coming around the corner. As ever, there are no guarantees.

View the latest Barclays share price and how to deal

Sign up for updates on Barclays

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Share insight: our weekly email

Sign up to receive weekly shares content from HL.