UK Banks’ FY21 Results: Solid Returns Largely Driven by Loan Loss Reversals
DBRS Morningstar has released a commentary discussing large UK banks’ FY21 earnings, covering HSBC Holdings plc, Barclays PLC, Lloyds Banking Group plc and NatWest Group plc.Key highlights:
• Large UK banks reported solid returns in FY21 mainly thanks to provision reversals. Income before provisions and taxes remained below FY19 levels on an aggregate basis.
• Bank of England’s interest rate increase is supportive of UK banks’ net interest income which is the largest contributor to revenues.
• The banks’ asset quality ratios improved in FY21 compared to the prior year, however, uncertainty remains with the prospects for rising inflationary pressure in 2022 and beyond which could affect borrowers’ cost of living and companies’ costs.
• The banks’ CET1 capital cushions are trending down due to dividends and share buy backs, as well as regulatory changes driving risk-weighted assets up, but from high levels.
“The jump in statutory net income in 2021 at large UK banks was largely driven by loan loss impairment releases as banks updated their asset quality models to reflect the negative impact of economic lockdowns being lower than initially anticipated. At the same time, banks' core revenues have suffered from lower interest income and higher operating costs. The Bank of England increased its key rate (up to 0.5%) and this will benefit UK banks’ top revenues in 2022. Meanwhile, CET1 capital buffers have started to come down from very high levels following shares buybacks and dividends announced by all the banks.” said Vitaline Yeterian, Senior Vice President, Global Financial Institutions, DBRS Morningstar.
Barclays is a holding company. Through its subsidiaries, Co. is a financial services provider engaged in retail banking, credit cards, wholesale banking, investment banking, wealth management and investment management services. Co.'s business segments are: Barclays U.K, which provides everyday products and services to retail customers and small to medium sized enterprises; Barclays International, which delivers products and services designed for Co.'s corporate, wholesale and international banking clients; and Head Office, which comprises head office and central support functions (including treasury) and businesses in transition.
HSBC Holdings is a financial services holding company. Through its subsidiaries, Co. operates four businesses: Retail Banking and Wealth Management, which serves customers through four businesses: Retail Banking, Wealth Management, Asset Management, and Insurance; Commercial Banking, which provides working capital, term loans, payment services, and international trade facilitation; Global Banking and Markets, which delivers a range of transaction banking, financing, advisory, capital markets, and risk management services; and Global Private Banking, which provides a range of private banking services. At Dec 31 2017, Co. had total assets of US$2.52 trillion and deposits of US$69.92 trillion.
Lloyds Banking Group is a financial services provider. Co.'s main business activities are retail and commercial banking, general insurance and long-term savings. Co.'s Lending products are mortgages, credit cards, personal and business loans; Deposit products include taking Current accounts and savings accounts; Insurance products are home insurance, motor insurance and protection; Commercial financing products includes term lending, debt capital markets and private equity; and Risk management products includes interest rate hedging, currency and liquidity. As of Dec 31 2017, Co. had total assets of £812.1 million and total deposits of £448.0 million.
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