With falling interest rates and a stabilising economy, is this hurting or benefiting UK banks?
Following a number of recent earnings results, here are some of the key takeaways and what could be next for some of the UK biggest banks.
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NatWest and Lloyds
In the shifting landscape of UK banking in 2025, traditional domestic players NatWest and Lloyds are showing signs of steady progress. Their second-quarter results reflect shared strengths against a backdrop of a stabilising UK economy.
Both banks are benefiting from improving profitability, as net interest margins – the difference between interest earned from borrowers and interest paid to savers - have slightly risen following earlier dips. – This reflects broader industry trends toward greater borrower stability.
Low default rates and lower-than-expected impairments point to ongoing consumer resilience.
Mortgage activity has also picked up, driven by a pull forward in demand as buyers got in ahead of stamp duty changes, and improving underlying demand.
Deposit flows have stabilised, with the earlier shift toward higher-yielding options now less of a drag on margins.
NatWest stands out with an upgraded full-year income outlook, helped by a structural hedge that’s now benefiting from more favourable rates – potentially softening the blow of any future base interest rate cuts.
Costs are trending toward efficiency targets, and with the government no longer a shareholder, the bank has greater freedom in where to put its money, as seen in a notable dividend increase and share buyback.
Lloyds, meanwhile, called out its own structural hedge as a dependable income anchor and continues to invest in expanding non-interest income streams, like insurance and wealth offerings.
Post-results, we’ve also had the Supreme Court’s ruling on car finance commissions, which brought some much-needed legal certainty.
Lloyds was more exposed than most, and the Financial Conduct Authority plans to explore a compensation scheme that could cost the industry £9-18bn. That’s a hefty sum, but some back-of-the-envelope maths would put Lloyd’s share of the scheme broadly in line with management expectations.
Overall, both banks are on solid footing and their valuations have rightly risen over the past year to reflect the improved outlook. We still think the UK domestic space is one of the best ways to gain exposure to any sector tailwinds.
Barclays
Barclays delivered a decent set of results, blending resilience with strategic finesse in turbulent times. Income rose above expectations, powered by strong UK operations and a vibrant Investment Bank, mirroring US peers' success.
Profits were better than expected, with revenue outstripping a rise in costs, while credit issues stayed in check and defaults were low. This underpinned a sturdy capital base, which meant the bank could increase shareholder payouts.
But given the financial strength, we’re a little disappointed Barclays didn’t put a little extra cash towards buybacks and dividends.
Over half of the profits come from the Investment Bank, which has been thriving on volatility as trading activity remains high. Barclays faces tough competition from the US giants, and one key question is whether this strong performance has legs in a range of environments.
Capital levels are healthy, and while we expected to see management hold on to a decent buffer, there are questions about whether it could be more adventurous in returning cash to shareholders.
This is a theme we’re seeing across the sector, and Barclays’ plan to return £10bn over 2024-26 looks pretty comfortable in our view, though nothing is guaranteed.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss. Yields are variable and not guaranteed.
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