We don’t support this browser anymore.
This means our website may not look and work as you would expect. Read more about browsers and how to update them here.

Skip to main content
  • Register
  • Help
  • Contact us

Is a structural hedge the UK banks’ secret weapon?

An often-overlooked financial strategy that could turn into an interest income tailwind for the next few years. What is the structural hedge and how are UK banks looking to benefit?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

First things first, what is a structural hedge?

Just as you might want to lock in a fixed price for your future electricity bills so you don’t get shocked by higher rates, banks do something similar with their money. They want to avoid any nasty surprises when it comes to interest rate swings.

The easiest way to picture the hedge is like a bond portfolio. Banks use some of their assets to create a portfolio of bonds and earn a stream of cash flows at a fixed interest rate. In practice, this portfolio is largely made up of complex financial instruments, called swaps, but let’s not get bogged down in the financial jargon for now.

As rates in the real world go up and down, the hedge helps limit the impact of rate volatility and smooths earnings.

Why is structural hedging important now?

One of the ways banks make money is the difference between the rates they pay on deposits and what they charge on loans. When interest rates are high, they make more money, but when they’re lower, they make less.

So where does the hedge come in?

In tougher times, when rates are falling, the hedge can help create a buffer against the rate move. But it’s not quite as helpful when rates rise.

Think back to a bond portfolio, if you’ve locked in 1% and rates rise to 5%, your portfolio is going to lose some paper value (as rates rise, bond prices fall) and you’re missing out on higher rates.

That’s exactly what we’re seeing in the UK’s major banks, and right now the hedge is limiting the benefits from higher rates.

The tides are turning

The good news for banks is that the low rates on hedge business written over the past few years aren’t locked in forever. The rapid rate rises we’ve seen this year means as old contracts mature, the balance is reinvested at much higher rates.

It’ll take several years for the entire hedge to move onto new contracts, so there’s no guarantee it will all reprice at current levels. But on the basis that rates don’t fall back to ultra-low levels, there’s a multi-year tailwind on the horizon.

This isn’t a small fish either, major UK banks are expecting to earn billions more in interest income over the coming years.

Gross hedge income (£ billions)

Scroll across to see the full chart.

Source: Bloomberg, 2025 estimates from RBC Capital Markets (accessed 23.10.23).

The takeaway for investors

The hedge is key for banking risk management and is expected to provide a significant tailwind to earnings over the next few years.

Banks face other challenges, not least from the potential for higher loan defaults and a trickier mortgage market. The sector’s been underperforming for some time.

Total return

Scroll across to see the full chart.

Source: Refinitiv Eikon 31/10/23 (UK banks represented by the Refinitiv UK Banks Index).

We think this unloved sector is worth a look. At depressed valuations, the yields on offer (factoring in both dividends and buybacks) are attractive. We also think UK banks are also in a much better place to weather potential storms than they have been in the past. Of course, there are no guarantees and past performance shouldn’t be seen as a guide to the future.

This article isn't personal advice. If you’re not sure if an investment is right for you, seek advice. Investments and any income they give you can fall as well as rise in value, so you could get back less than you invest.

Share insight: our weekly email

Sign up to receive weekly shares content from HL.

Please correct the following errors before you continue:

    Existing client? Please log in to your account to automatically fill in the details below.

    This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.


    Your postcode ends:

    Not your postcode? Enter your full address.


    Hargreaves Lansdown PLC group companies will usually send you further information by post and/or email about our products and services. If you would prefer not to receive this, please do let us know. We will not sell or trade your personal data.

    What did you think of this article?

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    Editor's choice – our weekly email

    Sign up to receive the week's top investment stories from Hargreaves Lansdown. Including:

    • Latest comment on economies and markets
    • Expert investment research
    • Financial planning tips
    Sign up

    Related articles

    Category: Shares

    Autumn statement 2023 – NatWest retail share offer

    The UK government could sell its NatWest shares to the public by the end of 2026. We look at how this could work and how you can stay up to date.

    Jason Roberts

    29 Nov 2023 4 min read

    Category: Autumn statement 2023

    Autumn statement top stock market takeaways

    Tax cuts, alcohol and tobacco duty changes, and housebuilding funding, what impact do we see this having on investing?

    Derren Nathan

    28 Nov 2023 5 min read

    Category: Shares

    How do volatile oil prices impact renewables and what does this mean for investors?

    We share how volatile oil prices impact investors and renewables, and look at what good looks like using Shell and BP as examples.

    Dominic Rowles

    27 Nov 2023 4 min read

    Category: Shares

    abrdn Asia Focus investment trust: November 2023 update

    In this update, Investment Analyst Henry Ince shares our analysis on the manager, process, culture, ESG integration, cost, and performance of the abrdn Asia Focus investment trust.

    Henry Ince

    27 Nov 2023 7 min read