The UK bank reporting season kicks off next week with Lloyds Banking Group PLC (LSE:LLOY) on Thursday and NatWest Group PLC (LSE:NWG) on Friday, off the back of strong earnings from US investment banks in recent days.
Barclays PLC (LSE:BARC) takes up the thread the week after, on Tuesday 29 July, followed by HSBC Holdings PLC (LSE:HSBA) on 30 July, and Standard Chartered PLC (LSE:STAN) on 31 July.
UK bank shares have performed well this year, with a gain of around 40% for Lloyds, 30% for Barclays and 23% for NatWest. For the more Asia-focused pair, Standard Chartered have risen 36% and HSBC 19%.
Many City analysts have been positive on the sector for some time, unsurprisingly given resilient earnings and robust capital returns as net interest margins have remained well supported by structural hedges, while credit quality has held up better than feared.
Additionally, easing regulatory rhetoric from the Bank of England and the Treasury has improved the outlook, helping to reduce the sector’s risk discount.
A pickup in M&A activity, including Santander's proposed acquisition of TSB at a premium to book value, has added a fresh catalyst and raised investor expectations for further consolidation.
Ahead of the earnings season, Shore Capital expects the sector to deliver another quarter of solid performance, underpinned by stable net interest margins (NIMs), robust credit quality and strong underlying capital generation.
Returns on tangible equity are expected to remain in double digits, supporting dividend growth and continued share buybacks, except Lloyds, which typically announces buybacks at the full year.
"The general backdrop for loan book growth has remained muted during the period, given the uncertain economic backdrop," said Shore Cap analyst Gary Greenwood.
Any expansion will be largely driven by market share gains and M&A activity, such as NatWest’s acquisition of the Sainsbury’s Bank loan portfolio in April, he added.
Meanwhile, deposit balances are expected to remain stable, supported by cash ISA inflows during a strong seasonal period, although future outflows may be prompted by proposed reforms encouraging savers to shift funds into higher-return investments.
While NIMs among the domestically focused banks should remain well supported by structural hedges, Greenwood cautioned that HSBC and Standard Chartered might face more pressure following recent interest rate declines in Hong Kong.
Barclays, which has the largest investment bank, is the most obvious beneficiary of positive read-across from US banks, which reported strong trading revenues on the back of market volatility driven by changing US tariff policy.
NatWest and StanChart also have not-insignificant IB operations.
Wealth management arms, especially those in Asia, are also expected to have seen resilient activity amid client portfolio repositioning.
Underlying credit quality remains robust, with no major deterioration expected. Where provisions were made for tariff-related risks, these may now be absorbed into updated modelling assumptions.
The sector continues to push for operational efficiencies, and capital generation is expected to remain strong, enabling most banks to maintain or grow shareholder returns.
Shore Capital believes higher bank valuations, improved capital generation and regulatory support may encourage more sector consolidation, though large-scale tie-ups still face competition-related hurdles.