The banking constituents of the FTSE 100 sailed through the second quarter results season, with interest income remaining steady and trading income skyrocketing due to market volatility.
The 'Big Five' banks on London's premier stock index – Barclays, HSBC, Natwest, Lloyds and Standard Chartered – collectively raked in £12.8bn in the three months leading up to June 30, as reported by .
However, the period was not without its challenges, as HSBC was compelled to earmark $2.1bn (£1.58) for write-downs.
If it weren't for substantial impairment charges – linked to the bank's stake in China's Bank of Communications – the Big Five would have easily surpassed 2024's second quarter total of £13.6bn.
William Howlett, a financial analyst at Quilter Cheviot, informed City AM that the lenders "all generated healthy levels of profitability."
He noted that domestic banks had profited from structural hedges – long-term strategies employed to offset interest rate risk – which helped to smooth the "benefit of prior interest rate rises."
Bank's interest income holds up
Net interest income (NII) was anticipated to be under pressure after the Bank of England cut interest rates from highs of 5.25 per cent to 4.25 per cent over the past year.
Dan Cooper, º£½ÇÊÓƵ banking lead at EY, told City AM that º£½ÇÊÓƵ banks achieved a three per cent growth in net interest income in the second quarter, thanks to "rising contributions from structural hedges and continued loan growth – particularly in the mortgage market."
The robust showing in NII enabled Britain's banking behemoths to exceed analyst forecasts for the quarter.
The Big Five's combined net interest income reached over £17.3bn, climbing £700m above the previous year's figure.
The total fell marginally below the first quarter's £17.6bn – when lenders capitalised on a mortgage lending boom as purchasers scrambled to beat the revised stamp duty threshold introduced by Chancellor Rachel Reeves.
Buyback bonanza
The quarter witnessed another wave of substantial buybacks, with HSBC unveiling a £2.26bn programme, NatWest £750m, Barclays £1bn and Standard Chartered £980m.
Russ Mould, investment director at AJ Bell, described the quarter's haul as "more than enough to fund a swathe of increased dividends and extensions to share buyback schemes, thanks to low loan losses, improved growth in loan books, very modest conduct costs, good cost control and resilient net interest margins."
Mould noted the dividend distributions and combinations "make for a heady combination for income-seekers" with the Big Five anticipated to deliver 11 per cent of their market capitalisations through these mechanisms in 2025.
Bank of America analysts suggested a Barclays and NatWest "surprise on buybacks" appeared probable given surplus capital following failed acquisition attempts.
NatWest reportedly submitted an £11bn offer for Santander whilst Barclays pursued TSB, which ultimately fell to Santander.
Trouble looms
Despite the optimistic beginning to the year, the forthcoming months present a series of challenges for the º£½ÇÊÓƵ's banking sector.
While a catastrophic outcome was prevented in the motor finance controversy after the Supreme Court supported the appeals of two banks, a regulatory compensation programme remains a possibility.
The Financial Conduct Authority anticipates the scheme will cost between £9bn and £18bn.
Hyder Jumabhoy, partner at White & Case LLP, said: "While it is too early to predict the full impact with certainty until the FCA's consultation process is complete, we expect this move to accelerate M&A activity due to some lenders having decreased risk appetite but also because of unused provision amounts becoming available for acquisitions. ".
"It could also prompt some car manufacturers to enter the º£½ÇÊÓƵ motor finance market to steady the supply of finance to buyers of new vehicles."
Meanwhile, banking leaders have also highlighted concerns regarding the consequences of a sector tax increase during the second quarter results period.
HSBC chief Georges Elhedery warned a bank levy would hamper expansion whilst Lloyds' Charlie Nunn described it as something that "wouldn't be consistent" with the government's growth strategy.
The executives also referenced the substantial rate already imposed on financial institutions, with CS Venkatakrishnan noting banks were "among the biggest tax payers in the country". Cooper stated: "Further taxation could impede the sector's ability to invest in the º£½ÇÊÓƵ and contribute to º£½ÇÊÓƵ GDP growth, and impact the wider attractiveness of the º£½ÇÊÓƵ market as a place for banks to operate."
However, this follows predictions from analysts at JP Morgan that Rachel Reeves may increase taxes by up to £30bn in an effort to regain her diminished fiscal headroom.
