UK Banks: Solid Results in FY22 in Spite of Higher Loan Loss Provisions

DBRS Morningstar has released a commentary discussing large UK banks’ 2022 earnings, covering HSBC Holdings plc, Barclays PLC, Lloyds Banking Group plc and NatWest Group plc.

Key highlights:

• Overall, the large UK banks reported solid results in FY22 largely driven by a significant increase in net interest income (NII) reflecting the impact of higher rates, temporary pricing lags, as well as growth in the mortgage and commercial lending books.

• At the same time, the uncertain economic environment and high inflation resulted in higher loan loss provisions. Asset quality started to show signs of deterioration although Stage 3 loan ratios remained low.

• We consider the large UK banks’ capital position is robust. Capital cushions above minimum requirements have reduced since the pandemic following an increase in RWAs, share buybacks and dividends, but generally remain solid.

• Despite the current market volatility affecting the financial sector globally following the failure of SVB, we consider the large UK banks are well placed in terms of asset and liability management and that the acquisition of SVB UK by HSBC is a small and manageable acquisition.

“We expect the contribution of net interest income to revenues will remain robust in 2023,” said Vitaline Yeterian, Senior Vice President, Global FIG at DBRS Morningstar. “However, the UK economy is facing a downturn. Therefore, we will continue to monitor any deterioration in the banks’ asset quality.”