Banks in Scope’s rated UK bank universe (Barclays, HSBC, Lloyds, NatWest, Santander UK) reported returns in line with guidance for full-year 2024. The average return on risk-weighted assets was approximately 2% and the average return on equity was 10%. The banks are targeting higher returns this year, although provisions related to UK historical car finance commission payments will pressure Lloyds’ and Santander UK’s bottom lines depending on the outcome of the appeal in the UK Supreme Court.

 “Average net interest income fell 4% in 2024 but we expect NII to remain elevated in 2025 due to continued recovery in loan growth,” said Alvaro Dominguez Alcalde, an analyst in Scope’s financial institutions team. “Meanwhile, average fee and commission income increased by 7%, excluding Santander UK, in 2024 due to strengthening customer and market activity. We expect the positive trend in non-interest income to remain for 2025 thanks to strong customer activity while some banks focus on expanding their wealth management businesses.”

Efficiency ratios are stable, reaching an average of 56% in 2024 (53% in 2023), as strong revenues absorbed wage increases caused by two years of high inflation and strategic investments. “We expect banks to maintain tight cost control in 2025 and efficiency levels to remain stable as lower revenues on the back of lower interest rates will be offset by a stabilisation in employee costs as high inflation fades,” Dominguez Alcalde continued.

Positive UK economic growth, low unemployment and loan arrears, strong underwriting standards and lower borrowing costs should support asset quality but while it will remain resilient, we also expect asset quality to deteriorate slightly in 2025. Banks showed mild year-on-year increases in stage 3 loans in 2024, thanks to higher charges for US consumer banking (Barclays), mainland China commercial real estate (HSBC) and a smaller mortgage book and some single-name cases in Corporate and Commercial Banking (Santander UK).

Capital levels remain adequate and aligned to management targets. We do not expect material changes in UK banks’ capital levels in 2025. “UK banks continue to maintain adequate capital buffers. They are optimising excess capital towards target levels through dividends and share buybacks while expected lending growth will lead to higher risk-weighted assets. This will be partially offset by continued capital generation, “Dominguez Alcalde said.

UK regulators have been under the spotlight as the UK government pursues policies aimed at stimulating economic growth. While the Prudential Regulation Authority is taking action to advance competitiveness and growth, it remains committed to its primary objective of ensuring the resilience and soundness of the firms it regulates.

“The measures taken and being proposed do not in our view materially change the highly regulated operating environment for UK banks. These measures include simplifying the prudential regime for small banks, further changes to remuneration requirements, and simplifying regulatory data reporting,” Dominguez Alcalde said.

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Scope has subscription ratings on the following UK banks. To view the ratings and rating reports on ScopeOne, Scope’s digital marketplace, or to register, please click on the following links:

Barclays plc
HSBC Holdings plc
Lloyds Banking Group plc
NatWest Group plc
Santander UK plc