Lloyds Banking Group PLC (LSE:LLOY) kicks off the UK bank reporting season next week with, for once, City analysts suggesting it’s not the best of the bunch.
Having acquired former building society Halifax, mortgages are a big part of the business and volumes are expected to remain low until interest rates decrease.
Additionally, Lloyds may face slower revenue growth through 2025 due to high 'back book' mortgage spreads, says JP Morgan.
Competition for customer deposits has been in line with expectations and not yet reached cut-throat levels, so margins (NIM) should still be good but if the Bank of England does start to reduce interest rates from September onwards that might change.
Lloyds has guided for NIM of less than 290bps in 2024 on an expectation of three base rate cuts, with a gentle decline in the first half to be followed by a gentle incline for the rest of the year.
In the first quarter, NIM was 2.95%, while UBS says the headwinds to NIM would continue to be the repricing of maturing high-yielding mortgages to lower levels and deposit churn both abating through 2024 and into 2025.
On top of that remains the uncertainty of potential redress due to the ongoing FCA motor finance inquiry, but UBS said that the current share price assumes a “significant miss to
target ROTE and/or substantial costs to shareholders from the motor finance redress".
Encouragingly, Labour leader Keir Starmer recently ruled out further taxes on banks, which could help alleviate the high cost of equity that UK banks have faced since 2016.
According to JP Morgan, NatWest Group PLC (LSE:NWG) in particular, stands out because continued privatisation after the upcoming elections could lead to an increased valuation as the UK government's stake in the bank becomes less significant.
The UK taxpayer now owns less than 20% of the bank despite this optimism, the analysts noted some challenges ahead but NatWest’s strong business franchise through RBS would get a boost if the UK economy does start to pick significantly.
UBS adds that optimism over NatWest has been buoyed by its first quarter NIM beating expectations by seven basis points and rising.
Almost all guidance for 2024 was reiterated in the first quarter including the £13.0-13.5bn income target, says UBS.
“We expect an income upgrade in the second quarter” added the bank driven by income, rising hedge returns, an easing of back book mortgage headwinds, better volumes and a Bank of England levy boost.