UK banks led the way in 2025, despite pressure on margins

During 2024 both US and UK banks performed reasonably well, comfortably outperforming banks in Europe, despite concerns in the US over the mid-tier banking sector in the wake of the collapse of Silicon Valley Bank.

These concerns over a combination of exposure to rising interest rates in the long-dated US treasury market, as well as an over concentration of customer deposits in the tech sector, saw a number of bailouts which prevented a wider scale collapse, and despite concerns over AI these concerns have abated now that interest rates appear to be on a downward path.

In the UK there was some concern about exposure to the car finance sector, along with what a new government might do when it comes to running the UK economy, however those concerns only started to manifest themselves in Q4 in the wake of the October budget.  

Despite these concerns 2025 has proved to be another successful year for the UK banking sector with further share price gains, easily outperforming its US peers, although the performance of the European banking sector has left both the UK and US in the dust, as the European banking sector reaped the same benefits of capital inflows that has seen the UK markets benchmark FTSE100 perform so well this year. 

Comparison: UK, US, and EU banking basket

A lot of the reason for this European outperformance in the last 3 years has been the return of positive interest rates, and while the ECB has only just stepped back from its current rate cutting cycle, European bank margins are in a much better place than they were when headline rates were negative.

The recovery in Europe’s banks has helped drive the likes of Commerzbank and UniCredit back to levels they were trading at over a decade ago, while the likes of Lloyds and NatWest aren’t even close.

Part of the reason for the underperformance of these 2 UK banks had been the dead hand of government oversight which had made them very much risk averse, while the rest of the sector has struggled with various self-inflicted problems of their own.

With NatWest now joining Lloyds fully back in private hands, and also under new management 

This year has seen the sector enjoy its best year for a while with strong performances across the board, although HSBC has found it slightly harder going, although this shouldn’t be surprising given its shares are at record highs and above the levels, they were pre-financial crisis.

UK banking margins underpin share price gains

Here in the UK, the stand out performers have been Lloyds, Standard Chartered with NatWest not too far behind.

The underperformance of Lloyds is more surprising perhaps given that the bank is more resilient and profitable than at any time since the financial crisis. 

NatWest shares have lagged somewhat this year after a strong 2024, which saw them outperform all their peers, and now that the bank is free from the dead hand of government ownership and under the stewardship of CEO Paul Thwaite and new Chairman Richard Haythornwaite, the bank can focus on what it does best, namely financial services.

UK banks performance YTD

Lloyds Banking Group has led the way this year, finally appearing to shake off the legacy of its past misdemeanours, although the latest provision for Black Horse Finance wasn’t particularly welcome, the bank is still improving its profitability on a year-on-year basis, with the share price finally pushing above the previous peaks seen in 2017.

Standard Chartered Bank also appears to be back on its feet as the predominantly Asia focussed bank seeing its share price back at levels last seen in 2013.

When we looked at the sector a year ago there was a feeling that despite the weaknesses in the UK economy, all of the banks were much more resilient to economic shocks than at any time since the financial crisis, and this was borne out earlier this month when the Bank of England relaxed its Tier 1 capital requirements on the sector from 14% to 13%.

It’s also been notable that despite 6 rate cuts in the last 18 months the UK banking sector has been able to maintain its net interest margins, although they have been helped in that by the fact that gilt yields have barely moved from where they were in July 2024.

Let’s look at each bank in turn.

NatWest Group

When NatWest reported in Q3 the numbers were very strong, the shares rising to the best levels since 2008. Profits for Q3 rose by 35.1% to £1.68bn, pushing profits for the year to date up to £4.35bn, an increase of 25% on last year.

Net interest margin saw a big improvement year to date, up 20bps to 2.31%.

The bank also raised its guidance for ROTE to 18% and said that total income for 2025 to come in at £16.3bn, having seen Q3 total income rise 15.7% in Q3 to £4.33bn. 

Like its peers NatWest saw loans to customers rise by 2% from Q2, while deposits slipped slightly to -0.3%. Over a 12-month period, both were higher to the tune of 3.7% and 0.5% respectively. 

Impairments came in at £153m, with £81m of that in respect of the integration of Sainsbury’s Bank.

Barclays

Coming off the back of 2 disappointing years in 2022 and 2023, the Barclays share price saw a renaissance in 2024, and which has continued in 2025, having put behind it the turmoil of the previous two years which saw its CEO Venkat come under scrutiny over some of its trading products in the US, and which saw the bank incur a multi-million US dollar hit. 

This year has seen the bank post more strong gains, pushing the shares back to levels last seen in 2008, despite concerns over its exposure to Tricolor, a US auto loans lender which collapsed.

Q3 Profit before tax came in at £2.1bn, slightly below expectations, taking profit before tax year to date to £7.3bn.

The bank also raised its guidance on Return on Tangible Equity (ROTE) to 11% as well as raising its forecast for NII to £12.6bn.

The bank also announced a £500m share buyback with further distributions to be announced on a quarterly basis.

The bank did take an additional charge on the UK motor finance provision, increasing it to £325m from £90m, an increase of £235m. There was also a further provision of £110m on the collapse of US auto loan company Tricolor, while also saying that it didn’t have any exposure to First Brands, another US auto lender.  

Lloyds Banking Group

In 2024 Lloyds Banking Group share price was held back by concerns over the banks’ exposure to the car finance sector, which prompted a sharp fall in the share price in late October 2024.

This move always seemed overdone especially when you consider that other banks had some exposure and given the very low valuation which Lloyds shares were already trading at.

Nonetheless caution was the watch word especially since Black Horse Finance was and is one of the biggest lenders to the UK car industry with loans totalling up to £16bn.

With the case now settled and the bank setting aside another £800m in October, taking the total set aside to £2bn, management can now focus on taking the bank forward with all the various legacy issues hopefully now in the rear-view mirror.

This additional provision meant that Q3 profits fell to £778m in Q3, a sizeable fall from last year’s £1.3bn, which included the additional £800m in respect of mis-sold car loans, as well as another £75m in respect of other legacy issues.

Net interest margin for Q3 came in at 3.06%, up from 2.95% a year ago despite rates being lower now.

When it comes to lending, demand appears to be holding up with loans to customers up by £6.1bn over the quarter, while customer deposits also rose by £2.8bn over the quarter.

On guidance Lloyds revised their forecasts for underlying net interest income higher, from £13.5bn, to £13.6bn, with operating costs for the year expected to rise to £9.7bn excluding the acquisition of Schroders Personal Wealth.

With the acquisition of Schroders, the bank will be able to expand this particular area of the business, as well as improve its profitability further to help push the shares up and through the 100p level in 2026.  

HSBC 

The movement in the HSBC share price this year has been an exercise in steady as she goes when compared to its peers but it is still positive, nonetheless, with the shares able to shrug off a $1.1bn hit on a provision on the back of the Madoff fraud case from a decade ago, but also a suspension of the share buyback program. This suspension is being used by management to buy the rest of Hang Seng Bank that it doesn’t already own as it looks to consolidate its Chinese business.

These collective blows were cushioned by an upgrade of its full year guidance in its recent Q3 earnings statement. Q3 profits before tax were still down 11% from last year, coming in at $7.3bn, but crucially were still higher than Q2’s $6.3bn.

Q3 revenue came in at $17.8bn, a rise of 5% helped by growth in fee income in the Hong Kong business segments of wealth and Premier banking.

Net interest margin was slightly higher at 1.57%, while (NII) Net Interest Income increased to $1.1bn. Both customer lending and customer deposit balances were both up on last year. An interim dividend of 10c a share was announced.

On a regional basis, the UK bank showed few signs of customer stress with Q3 revenue up by 6% at $3.3bn, although profits were lower by $81m at $1.64bn due to higher provision of ECL of $271m, an increase of $91m, or 51%, as well as higher operating costs.

There was also higher provision with respect to commercial real estate, both here in the UK as well as HK, with the total set aside in the region of $6.8bn.

On the outlook the bank said it expected to deliver NII of $43bn or better in 2025, as well as a mid-teens or better Rote for 2025, despite the extra cash that is being used to buy the rest of Hang Seng Bank, with the cash that had originally been allocated to buybacks being used to facilitate this.  

Banks resilience held up well in 2025, with mortgage arrears falling 

The last 12 months have seen more strong gains for the UK banking sector with Lloyds, Barclays and Standard Chartered leading the way with NatWest and HSBC lagging somewhat.

Lloyds shares appear to be finally gaining traction and could well go through the 100p level as long as management stays clear of any further controversies.

Looking ahead to 2026, the main challenges for the sector will again be the risk of a slowing economy as businesses look to adapt to the higher costs brought about by the recent budget.

The last 12 months have seen some concern over householders having to pay more on their mortgages as their fixed rate deals expire, however thus far we’ve seen little evidence that is causing an increase in late payments, in fact the data from UK Finance suggests that mortgage arrears have been slowly declining for both homeowner and buy to let mortgages during 2025.

Nonetheless the fiscal drag from that could well start to weigh on the economy as more and more deals come up for roll-over.

Mercifully we have seen gilt yields remain steady from the levels they were a year ago even if they are still high relative to yields elsewhere.

The bigger test will come in terms of future interest rate cuts from the Bank of England and the speed at which inflationary pressures ease. For now, interest margins have remained steady and, in some cases, have improved.

This may well change if we see further rate cuts from the Bank of England in response to either a slowing economy, or weaker inflationary pressure.

Despite the very real pressures being faced by UK households the banking sector looks to be in much stronger shape now than it has been since the financial crisis, with the recent relaxation of tier 1 thresholds by the Bank of England testament to that.

Whether that continues in 2026 remains an open question, with concerns about the UK economy very much front and centre, along with the risk that the sector could find itself in the cross hairs of the government when it comes to future profit levies.

Despite these risks the sector still has pockets of value with both NatWest and Lloyds shares still well below their pre-financial crisis levels.