UK banks show strong performance in Q4 but face unique challenges in 2023

The news: UK banks faced unique challenges during Q4 2022 that their US counterparts didn’t.

Here’s a look at the results—and what set the UK apart from other regions.

Profits were mostly up:

  • Lloyds Bank reported a net profit of £5 billion ($5.9 billion) for the quarter, up from £4.12 billion ($4.85 billion) in the same period the prior year.
  • HSBC ended Q4 with net income of $4.89 billion, up 142% YoY.
  • NatWest reported an operating profit before tax of £1.4 billion ($1.65 billion) for the quarter, up from £543 million ($639 million) in Q4 2021.
  • Barclays’ profits declined 4% YoY.

High interest rates fueled net interest income (NII):

  • Lloyds reported NII up 26% YoY to £3.6 billion ($4.2 billion).
  • HSBC’s NII surged 41%, hitting $9.57 billion.
  • NatWest’s NII increased 10.2% to £2.9 billion ($3.4 billion) YoY.
  • Barclays’ NII came in at £5.9 billion ($6.9 billion), up 13%.

Some banks had one-off events:

  • Barclays is still dealing with impairments related to over-issuing securities in the US. Its investment bank’s return on equity also fell to 6.4% for the quarter, down from 9.9% in Q4 2021.
  • HSBC is dealing with pressure from major shareholder Ping An to divest its Asian operations. It’s also considering a special dividend for shareholders after it sells its Canada banking business later this year.

What’s happening in the UK?

  • Cost-of-living crisis: UK citizens face near-record inflation. Consumers are asking their banks for help to weather the storm, but many don’t trust their bank will do anything. But there’s some hope UK inflation has peaked—January CPI was still at 10.1% YoY but fell for the third consecutive quarter.
  • Mini-budget mayhem: When former Prime Minister Liz Truss introduced sweeping tax cuts funded by government borrowing, the pound plummeted, asset markets spiraled, and mortgage rates shot through the roof. Those effects are expected to last through much of 2023. Some forecasts predict the UK’s economy will shrink in 2023.
  • Banks under fire: Despite calls for help from consumers, many UK banks are being criticized for not passing the benefits of higher interest rates along to customers in the form of better savings rates. But banks are holding out, largely because consumer debt repayment remains healthy.

The bottom line: UK banks’ strong Q4 performance beat banks in other regions, but the outlook in the UK contrasts sharply with the cautious optimism of banks in the US.

UK consumers are beginning to flounder under rising rates and inflation, and many will likely turn to financial institutions that can help them save. UK banks will need to approach 2023 with customer compassion,—or risk losing their base to more generously paying neobanks.

This article originally appeared in Insider Intelligence’s Banking Innovation Briefing—a daily recap of top stories reshaping the banking industry. Subscribe to have more hard-hitting takeaways delivered to your inbox daily.