What next for UK Bank Stocks?

UK banks have overall reported improved earnings thanks to rising interest rates, but it’s not necessarily blue sky ahead amid growth fears and lost business with Russia and China.

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Some of the problems

HSBC reported a drop in profits on Tuesday, but still managed to beat analyst's expectations. Though, the "world's local bank" is in a somewhat unique position having a large presence in Europe as well as in China. And given the rise in Omicron in China and the problems in the housing industry, it wasn't surprising the bank had less than stellar results.

A similar thing happened a little later with Deutsche Bank, which also reported substantially lower investment banking returns. The increased risk-off environment has affected the bottom line for banking firms profiting on investors seeking to jump into the market. Of course, DB didn't have the advantage of higher interest rates.

Where things could be going

Lloyds Bank reported on Wednesday, beating estimates. But being a mortgage lender, it had a better chance to take advantage of wider interest rates spreads. Even so, it warned that the economic conditions meant that more defaults could be coming and increased its provisions.

Barclays reported a similar pattern on Thursday. The bank had an increase in pre-provision profit but set aside more money for potential defaults, resulting in a lower profit and less room for share buybacks. Net interest margin increased, but investment fees dropped.

Natwest on Friday posted a 41% rise in profits, boosted by a strong UK economy with covid restrictions fully lifted and high jobs growth and rising interest rates.

UK banks can improve net interest margins from higher interest rates, but the uncertainty particularly around Ukraine and potential economic slowdown might weigh on loan demand and offset gains on the bottom line. Looking further out, it could mean the financial sector is in a much more solid position once the current uncertainties resolve.

FTSE remains bullish

The UK’s 100 index has had a couple of good sessions as of late after a successful bounce at the 200-day average, which carried it above the 50 MA too - and back into the alignment of an uptrend..

If bulls persist, the index might revisit record highs at 7913, but prior to there the 7700 resistance must break first. If momentum starts to wane and price drops back under the 200 SMA, it would imply a deeper correction towards the March lows.

Source: TradingView

Key Takeaways

Investment banking returns have been affected by the risk-off environment. HSBC beat analyst's expectations but because of the rise in omicron and the problems of the housing industry, it was not surprising that their profits were dismal.

UK banks have the potential to gain higher profits from interest rates, but the existing uncertainty particularly around Ukraine and potential economic slowdown might offset gains on the bottom line.