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UK banks quarterly: credit fundamentals still resilient but moderating
Performance in Q1 was broadly in line – if not stronger – than 2025 guidance. The average return on risk-weighted assets was roughly 2.5% for the banks in our sample (Barclays, HSBC, Lloyds, NatWest, Santander UK), and the average return on equity was around 11%. Both were marginally higher than 2024.
“The main drivers of this strong performance were solid net interest income, supported by higher loan volumes,” said Alvaro Dominguez Alcalde, lead analyst for UK banks. “Wider deposit margins and a growing contribution from the rollover of structural hedges into higher yields led to better net interest margins. Fee and commission income for our bank sample (excluding Santander UK) increased by 8% owing to strong customer and market activity that we anticipate will persist throughout the year.”
“Key risks to our relatively benign revenue outlook include rising geopolitical tensions and market volatility, which could dampen customer sentiment and weigh on capital markets and trading income,” Dominguez Alcalde cautioned. “Geopolitical and trade-related risks also skew the balance of risk for asset quality to the downside.”
Cost of risk increased due to higher loan-loss provisions driven by model adjustments for heightened US economic uncertainty and a deteriorating outlook due to higher trade tariffs and geopolitical tensions. “We expect UK banks’ cost of risk continue increasing for the remainder of the year, but it should remain close to guidance and targets for 2025.”
Auto finance exposures have so far had only a moderate impact on UK banks rated by Scope, although additional provisions could weigh on the profitability of Lloyds and Santander UK.
Despite generous capital distributions, UK banks reported stable capital levels in Q1, as strong organic generation offset dividends and buybacks. The average CET1 ratio was 14.1% at Q1 2025 and all banks reported CET1 ratios above their respective capital management targets. “For the remainder of 2025, we expect capital trends to remain intact. Steady earnings generation will be sufficient to finance RWA growth and high levels of shareholder remuneration,” Dominguez Alcalde said.
A key regulatory issue concerns the UK ringfencing regime. Earlier this year, the regime was reformed so it now applies only to banks with over GBP 35bn in deposits (up from GBP 25bn). Further flexibility was introduced for banks with limited trading activities and restrictions on certain activities, including cross border, were relaxed.
HSBC, Lloyds and NatWest are calling for further reform because of the additional costs they are incurring. Barclays, by contrast, is opposing any change or relaxation of the current regime, which it considers a strong and secure form of domestic depositor protection. “We consider the ringfencing regime as a helpful feature enhancing financial stability, in particular by lowering banks’ deposit funding risks,” Dominguez Alcalde said.
Download the UK bank quarterly here.
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