Stocks of HSBC soar - could their cost-reduction strategy be proving successful?
Major UK Banks Shine in 2025 with Strong Profit Growth
The UK banking sector is basking in a "pretty decent earnings season all round," as major players like Lloyds Banking Group, Barclays, and NatWest have reported impressive financial performances for 2025.
Lloyds Banking Group posted a statutory profit after tax of £2.5 billion for the first half of 2025, a slight increase from £2.4 billion in the same period last year. The bank's net income grew 6% year-on-year, bolstered by a net interest margin of 3.04% and higher interest-earning assets of £458 billion. Despite a modest increase in operating costs due to inflation and strategic investments, asset quality remained robust. Lloyds is investing to grow non-interest income streams like insurance and wealth management, while relying on its structural hedge for dependable income.
Barclays achieved a half-year pre-tax profit of £5.2 billion, a 23% increase versus the previous year. The bank's diversified business model and geographic reach have supported strong share price gains, with Barclays' shares up around 30% year-to-date. The investment banking segment has benefited from increased fees and advisory activities, despite a slowdown in M&A and IPO markets. The bank's credit card portfolio performance remains stable, with no deterioration in delinquencies in both the UK and US.
NatWest delivered a half-year pre-tax profit of £3.6 billion, a 18% increase year-on-year. The bank's outlook has improved with an upgraded income forecast, enabled by a structural hedge benefiting from favourable rates. NatWest is focused on cost efficiency and returning capital to shareholders via dividends and share buybacks. Mortgage demand and deposit flows have stabilized, reinforcing resilience.
Common themes across these UK lenders include rising net interest margins driven by higher interest rates, stable or low default rates, and strategic diversification into fee-based businesses to improve income quality. However, they face some regulatory/legal uncertainties. For instance, Lloyds is exposed to a potential industry-wide compensation scheme related to car finance commissions, estimated at £9-18 billion for the sector.
Meanwhile, HSBC's shares are at a six-year high, and the absence of any signs of stress among the banks' core customer base is considered positive. HSBC is planning to merge divisions and divide management along East-West lines, but has not yet commented on the financial implications or cost savings. The bank has promised a further $4.8 billion in distributions to shareholders through buybacks and dividends.
Elsewhere, Hargreaves Lansdown's Matt Britzman mentioned a Court of Appeal ruling in favour of a claimant against Close Brothers for failure to disclose commissions. If upheld, the verdict would hit Lloyds particularly hard, with a total liability of up to £2 billion. However, the broader Lloyds investment case "looks solid."
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- Investors can anticipate increased dividends from NatWest due to its improved outlook and focus on returning capital to shareholders.
- The strong performance of major UK banks like Barclays and Lloyds Banking Group in 2025 has been influenced by rising interest rates, which have boosted their net interest margins.
- Hargreaves Lansdown's Matt Britzman highlighted a potential liability of up to £2 billion for Lloyds Banking Group, stemming from a Court of Appeal ruling in favor of a claimant against Close Brothers over undisclosed commissions, which could impact their saving prospects.
