UK banks head into the 2026 reporting season in good shape, but expectations are getting harder to meet. The latest Bank of England data suggests solid loan and deposit growth in December. But it’s not the top-line that has everyone on edge.
The worry now is deposit pricing, ie how much banks pay customers for their savings.
With the Bank of England's base rate expected to fall this year, UBS said conversations with institutional investors are increasingly focused on “downside risks to deposit spreads”.
With deposit spreads being the difference between what banks earn on loans and what they pay out on deposits, banks used falling deposit rates to manage the last rate cycle; that is, they cut savings rates faster than the BoE did rates.
But will they be able to do it again, or will competition get in the way?
There are already signs of tension, UBS analyst Jason Napier noted.
In Lloyds Banking Group PLC (LSE:LLOY) results last week, the bank flagged a “more competitive environment for UK deposits – term especially”, while Napier flagged that Paragon Banking Group PLC (LSE:PAG) is choosing to use cheaper BoE funding rather than pricey customer money.
And with deposit betas creeping higher – about 30% so far – spreads are at risk.
December BOE data shows broadly stable overall lending yields and deposit costs, and continued volume growth, "but we remain vigilant", said Napier.
He thinks UK banks remain more insulated than their European peers – for now – thanks to favourable hedge accounting and a rational approach to margin trade-offs.
“The importance of price discipline / spread trends cannot be overstated,” he said.
Still, investors mulling investments in the sector might want to wait for the remaining banks' full-year outlooks, it was suggested.
With UK domestic bank shares trading on 9.7 times 2026 estimated earnings and 1.4x tangible NAV, with mid-teen returns on equity, UBS's 'buy' ratings are on Barclays PLC (LSE:BARC), NatWest Group PLC (LSE:NWG), Paragon and Shawbrook Group PLC (LSE:SHAW), and a 'neutral' stance on Lloyds and Close Brothers Group PLC (LSE:CBG).