2025 Large UK Banks Outlook: Solid Profitability, But Motor Finance Commissions Redress Adds Uncertainty

Morningstar DBRS has released a commentary discussing the 2025 outlook for large UK banks, covering HSBC Holdings plc, Barclays PLC, Lloyds Banking Group plc and NatWest Group plc.

Key points:
-- Large UK banks have clouds on the horizon, but we expect the positive momentum in revenue to continue thanks to lending growth, structural hedging in place, and contained loan loss provisions, although increasing from low levels.
-- In 2025, asset quality could deteriorate although from low levels, as interest rates will remain above the past decade levels. UK interest rates have remained higher than anticipated with less rate cuts in 2024 compared with initial consensus.
-- It is unclear what the financial impact will be from the UK Financial Conduct Authority's review and the Court of Appeal's ruling on motor finance commissions, but we expect it to be material.
-- We think the banks will maintain solid capital levels in 2025. The banks' capital positions remained strong at end-Q3 2024, reflecting their solid capacity to generate earnings, although partly offset by returns to shareholders and small domestic acquisitions.

" We expect the large UK banks to see positive revenue trends in 2025" said Vitaline Yeterian, Senior Vice President, European Financial Institution Ratings at Morningstar DBRS. "At the same time, we expect the banks affected by the Financial Conduct Authority's review and the Court of Appeal's ruling on motor finance commissions to start adding provisions from Q4 2024 if they have not already done so to cover any potential expenses."