Coverage: weekly note · Information to 26 February 2025
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TGB Weekly Research Note · 26 February 2025
Quarterly margins at Lloyds Banking Group, NatWest Group and Barclays UK were at their lowest for 2024 in the first or second quarter and rose through the second half, as the Bank of England began cutting Bank Rate in August 2024 and Lloyds and Barclays credited growing structural hedge earnings.
The desk view
The margin squeeze of 2023 had run its course by the first half of 2024 at the three large UK domestic lenders. Lloyds Banking Group's banking net interest margin reached 2.93% in the second quarter of 2024, while NatWest Group's and Barclays UK's lowest 2024 readings came in the first quarter. All three then rose quarter by quarter to the end of the year. The Monetary Policy Committee cut Bank Rate to 5% at its meeting ending 31 July 2024, to 4.75% in November and to 4.5% in February 2025. Lloyds and Barclays point mainly to growing structural hedge earnings and NatWest to wider deposit margins, and the Bank of England's November 2024 Financial Stability Report expects the structural hedge to cushion the effect of lower policy rates. Our reading is that the remaining risk to margins is the pace of further cuts rather than the deposit and mortgage pressures that drove the decline.
Where the floor was
Margins at the large UK domestic banks had been falling since 2023. The Bank of England's June 2024 Financial Stability Report said that in 2024 Q1 major UK banks' net interest margins were down relative to their 2023 Q2 peaks, and that consensus estimates suggested a further small fall that year, although margins were expected to stay just below their long-run average. Lloyds Banking Group's banking net interest margin fell from 3.22% in Q1 2023 to 2.98% in Q4 2023.
The quarterly figures published with the 2024 full-year results show where the floor was. Lloyds' margin was 2.95% in Q1 2024 and 2.93% in Q2 2024, before recovering to 2.95% in Q3 2024 and 2.97% in Q4 2024. NatWest Group's margin was 1.99% in Q4 2023, 2.05% in Q1 2024 and 2.10% in Q2 2024, then 2.18% in Q3 2024 and 2.19% in Q4 2024. Barclays UK's margin was 3.04% in Q3 2023 and 3.07% in Q4 2023, then 3.09% in Q1 2024, before rising to 3.22%, 3.34% and 3.53% over the following three quarters.
The low points therefore differ by bank. Of the eight quarters in its results, Barclays UK's weakest was Q3 2023, and NatWest's Q4 2023 margin of 1.99% was below every 2024 quarter; for Lloyds the low was Q2 2024. In each case the lowest quarter of 2024 fell in the first half. Barclays UK's fourth-quarter figure also includes Tesco Bank, whose acquisition completed on 1 November 2024.
Net interest margin by quarter, %
| Bank | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 | 2024 |
|---|---|---|---|---|---|---|
| Lloyds Banking Group (banking NIM) | 2.98 | 2.95 | 2.93 | 2.95 | 2.97 | 2.95 |
| NatWest Group | 1.99 | 2.05 | 2.10 | 2.18 | 2.19 | 2.13 |
| Barclays UK | 3.07 | 3.09 | 3.22 | 3.34 | 3.53 | 3.29 |
Source: Lloyds Banking Group plc, 2024 Results (Form 6-K), 20 February 2025; NatWest Group plc, 2024 Interim Results (Form 6-K), 26 July 2024; NatWest Group plc, 2024 Annual Results (Form 6-K), 14 February 2025; Barclays PLC, 2024 Results Announcement (Form 6-K), 13 February 2025.
What drove the first-half squeeze
Lloyds' and NatWest's first-half explanations point to the same two pressures: mortgage refinancing at thinner spreads and customers moving deposits into accounts that pay more. Lloyds said its 2.94% first-half margin, against 3.18% a year earlier, reflected deposit churn and asset margin compression, particularly in the mortgage book, partially offset by higher structural hedge earnings. Its underlying net interest income was £3,154 million in the second quarter of 2024, slightly below £3,184 million in the first, as asset margin compression in UK mortgages, deposit mix headwinds and lower Commercial Banking deposits continued. Lloyds nonetheless kept its guidance of a 2024 banking margin greater than 290 basis points.
NatWest's first-half margin was 2.07%, 16 basis points below the 2.23% of H1 2023, which it attributed principally to mortgage margin pressure and to customers moving from non-interest bearing to interest bearing accounts. But its Q2 2024 margin was already 5 basis points higher than in Q1 2024, primarily because of improved deposit margins. This suggests that, for NatWest, deposit margins had begun to work in its favour before Bank Rate moved.
Rate cuts met hedges in the second half
The Monetary Policy Committee had raised Bank Rate from 0.1% in December 2021 to 5.25% in August 2023. At its meeting ending 31 July 2024 it voted 5–4 to cut by 0.25 percentage points to 5%, with four members preferring to hold at 5.25%. It cut again to 4.75% at its meeting ending 6 November 2024, by 8–1, and to 4.5% at its meeting ending 5 February 2025, by 7–2, with two members preferring a larger cut to 4.25%. That took the cumulative reduction to 0.75 percentage points.
Margins rose over the same period. Lloyds said that in Q4 2024 growth in structural hedge earnings more than offset deposit churn and asset margin compression, lifting its margin to 2.97% from 2.95%. Its full-year margin of 2.95% compared with guidance of greater than 2.90% and benefited from fewer than expected Bank Rate cuts, solid deposit volumes and the structural hedge contribution. Lloyds earned £4.2 billion from sterling structural hedge balances in 2024, against £3.4 billion in 2023. Barclays' gross structural hedge contributions rose to £4,708m from £3,623m. Barclays UK's 2024 margin was 3.29%, against 3.13% in 2023, and its net interest income rose 3% to £6,627m as structural hedge momentum and fourth-quarter Tesco Bank income outweighed adverse deposit dynamics, which stabilised through 2024, and mortgage margin compression. NatWest's Retail Banking reported margin momentum from higher product structural hedge margins, partly offset by the rate cuts.
The Bank of England's November 2024 Financial Stability Report draws the same link. It expected major UK banks' margins to stay close to their long-run average, partly because the structural hedge should dampen the impact of lower policy rates, just as it dampened the benefit when rates were rising.
Lloyds Banking Group banking NIM, %
Source: Lloyds Banking Group plc, 2024 Results (Form 6-K), 20 February 2025.
What the guidance implies for 2025
Lloyds expects sterling structural hedge earnings to be £1.2 billion higher in 2025 than in 2024, and £1.5 billion higher again in 2026, with underlying net interest income of around £13.5 billion in 2025. Barclays guides to Barclays UK net interest income of around £7.4bn in 2025, against £6,627m in 2024. Tesco Bank has been reported within Barclays UK only since 1 November 2024. Part of the increase is therefore likely to reflect a full year of its income. NatWest expects a return on tangible equity of 15-16% and income excluding notable items of £15.2-15.7 billion.
The trough in margins, in other words, came before the easing cycle rather than because of it. With hedges still rolling onto higher yields, the larger variable for 2025 is how quickly Bank Rate falls from 4.5%, since Lloyds credited part of its 2024 margin to cuts arriving more slowly than expected.
What to watch
- 20 March 2025: publication of the MPC decision and minutes for the meeting ending 19 March 2025.
- 30 April 2025: Barclays Q1 2025 results announcement.
- 1 May 2025: Lloyds Banking Group Q1 2025 interim management statement.
Primary sources: Bank of England, Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending on 31 July 2024, 1 August 2024; Lloyds Banking Group plc, 2024 Results (Form 6-K), 20 February 2025; NatWest Group plc, 2024 Interim Results (Form 6-K), 26 July 2024; Barclays PLC, 2024 Results Announcement (Form 6-K), 13 February 2025; NatWest Group plc, 2024 Annual Results (Form 6-K), 14 February 2025; Bank of England, Financial Stability Report - June 2024, 27 June 2024; Bank of England, Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending on 6 November 2024, 7 November 2024; Bank of England, Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending on 5 February 2025, 6 February 2025; Bank of England, Financial Stability Report - November 2024, 29 November 2024; Lloyds Banking Group plc, 2024 Half-Year Results (Form 6-K), 25 July 2024; Bank of England, Monetary Policy Report - August 2024, 1 August 2024.