What's next for UK banks?

Last week, major UK banks generated more income and set aside more to prepare for potential economic headwinds. Where now, for the sector?
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Higher income but not as much profit

Major UK banks set aside up to £1.3B in provisions, which is much less than what was put aside for covid (at the time, Barclays alone put aside £1.6B). Still, it was enough to reduce the profitability of the major banks. Immediately following HSBC's earnings, politicians called for a windfall tax on UK banks, but this has reportedly been dismissed, according to a story by the Sunday Telegraph. Despite reporting a profit above expectations, HSBC reported a halving of profits compared to the prior year. The bank's exposure to China dragged on results compared to other UK-based entities.

Barclays, as a counterpoint, saw increased profits compared to the prior year, even after tripling its provisions. Lloyds saw a drop in profits compared to the preceding year, which mostly matched the significant increase in provisions. Banks generally made more on the interest rate spread thanks to higher interest rates. The market commotion following the mini budget issue in September didn't affect major banks much.

What lies ahead?

UK banks also started cutting back on the "Truss premium"; that is, higher rates charged due to the increased uncertainty around the budget. Since the expected risk never came about, the higher interest rates likely will be recognised as profit for the banks. But a recent study by EY shows that UK banks are not only facing issues with potential credit losses. It suggested that the top line could also be affected next year as mortgage lending is forecast to slow dramatically and business lending to contract by 3.5% next year.

In the short term, the cost of living crisis would likely push British consumers to take out more credit, helping banks with their more lucrative product. But trading volume would likely diminish once the expected recession starts to bite. Then the BOE would be expected to cut rates, ending higher rates; increased net interest income. Banks are likely under pressure, even without a windfall profits tax.

Barclays at crossroads

Barclays hangs around 150.00 (R1) after accurately completing the measured move (H) of the rising wedge breakout at 132.00 (S1). This has become a double bottom, provided the January & 39;20 support holds firm. If 150.00 breaks, a leg towards 175.00 (R2) can be expected in the near term, with the longer end around the 200.00 (R3) resistance. However, if bullish momentum wanes, revisiting the double bottom will increase the chances of a breakout, opening the door to 90.00 (S3) after a slide below 112.00 (S2).

Key takeaways

UK banks are struggling to keep up with profits compared to last year due partly to increased provisions. This has led to calls for a windfall tax on banks, but this has reportedly been dismissed. Of the major UK banks, Barclays saw increased profits despite tripling its provisions, but this could appear in succeeding quarters and not in the short term. Lloyds missed expectations citing last year's provisions, and HSBC blamed the results on China. UK banks have been charging higher interest rates due to increased uncertainty around the budget, but a recent study suggests that this could backfire. If the economy weakens as expected, the central bank will likely cut interest rates, reducing banks'; profits regardless.