Coverage: Q3 2024 · Information to 13 December 2024
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TGB Quarterly Country Banking Sector Report · 13 December 2024
Major UK banks reported returns around their cost of equity in the third quarter of 2024, a broadly unchanged capital ratio at mid-year and a 151% liquidity coverage ratio in September, as Bank Rate began to fall and a Court of Appeal ruling on motor finance commission added a conduct risk that lenders were still assessing.
The desk view
The Monetary Policy Committee cut Bank Rate to 5% at its meeting ending 31 July 2024 and to 4.75% at its meeting ending 6 November, while signalling that further easing would be gradual. Major UK banks earned an underlying return on tangible equity of 14.0% in the third quarter, around estimates of their cost of equity. They reported an aggregate CET1 ratio of 14.8% at mid-year and a liquidity coverage ratio of 151% in September. Credit quality has held up: the share of stage 2 loans fell to 9.5% and mortgage arrears were 1.1% in the third quarter. The Court of Appeal judgment on motor finance commission led Santander UK to book a £295m provision, and the Financial Conduct Authority has said it will consult on extending complaint-handling deadlines. The pattern points to a sector where, for now, conduct risk is a larger swing factor for earnings than credit risk.
Macro and policy: easing begins as growth stalls
The Monetary Policy Committee (MPC) voted by a majority of 5–4 at its meeting ending 31 July 2024 to cut Bank Rate by 0.25 percentage points to 5%, with four members preferring to hold at 5.25%. At its meeting ending 18 September it held the rate at 5% by 8–1, with one member preferring a cut to 4.75%. It then cut Bank Rate by 0.25 percentage points to 4.75% by 8–1 at its meeting ending 6 November, with one member preferring to hold. That took the cumulative reduction since July to half a percentage point. In November the Committee said a gradual approach to removing policy restraint remained appropriate and that policy would need to stay restrictive for sufficiently long until risks to inflation returning sustainably to the 2% target had dissipated further.
In September the MPC voted unanimously to reduce the stock of UK government bonds held for monetary policy purposes by £100bn over the 12 months from October 2024, to a total of £558bn. The stock stood at £655bn on 6 November. This is consistent with the shift in banks' liquid asset buffers away from central bank reserves, discussed under capital and liquidity below.
Twelve-month CPI inflation was 2.2% in August, with services inflation still elevated at 5.6%. It fell to 1.7% in September, when services inflation declined to 4.9%. It then rose to 2.3% in October, with core CPI at 3.3% and services inflation at 5.0%. The Bank of England's November Monetary Policy Report projected CPI inflation rising from the 2% target in 2024 Q3 to around 2¾% by the second half of 2025, on the market-implied path for Bank Rate. The MPC provisionally expected the measures in Autumn Budget 2024 to raise the level of GDP by around ¾% at their peak in a year's time, relative to its August projections, and to lift CPI inflation by just under half a percentage point at the peak.
UK CPI inflation, 12-month rate, %
Source: Bank of England, Monetary Policy Summary and minutes, meeting ending 18 September 2024, 19 September 2024; Office for National Statistics, Consumer price inflation, UK: October 2024, 20 November 2024.
Real GDP grew by an estimated 0.1% in the third quarter, after 0.5% in the second. The unemployment rate for people aged 16 and over was estimated at 4.3% in July to September.
Lending, deposits and system structure
The Bank of England's November Financial Stability Report (FSR) said UK banks' gross and net lending volumes had continued to rise since 2024 Q1, with total net lending at its highest since 2022 Q3 but still below its 2015–19 average, even in nominal terms.
Average quoted rates on 75% loan-to-value mortgages had fallen by 78bp since May, according to the November Monetary Policy Report. The effective rate on newly drawn mortgages fell 15bp to 4.61% in October, the lowest since May 2023, while the rate on the outstanding stock of mortgages rose to 3.78%, a series high. The gap between the two was 0.83 percentage points. This suggests the back book is still repricing upwards even as front-book pricing falls.
Net mortgage approvals for house purchase were 65,600 in September on the first published estimate, and 68,300 in October, in each case the highest since August 2022. Net mortgage borrowing by individuals rose by £0.9bn to £3.4bn in October, and the annual growth rate of net mortgage lending rose to 1.1%. In the Bank's Credit Conditions Survey for 2024 Q3, lenders reported that the availability of secured credit to households increased in the three months to end-August and expected it to be unchanged over the following three months.
Annual growth in consumer credit eased to 7.3% in October from 7.5% in September, still well above the 1.1% annual growth in net mortgage lending. Bank borrowing by large businesses grew at an annual rate of 2.2% in October, while borrowing by small and medium-sized enterprises (SMEs) contracted at an annual rate of 2.9%. Lenders reported that overall credit availability to the corporate sector was unchanged in Q3, with availability to small businesses unchanged and to medium-sized and large businesses slightly increased. The pattern points to a two-speed corporate market in which SME bank borrowing is still contracting even as larger firms borrow more.
Households' deposits with banks and building societies rose by £20.2bn in October, the largest increase since December 2020. At Lloyds Banking Group, underlying loans and advances to customers rose by £7.3bn in the year to date to £457.0bn at 30 September, including £4.6bn in the third quarter. Its customer deposits were £475.7bn, up £4.3bn in the year to date.
Barclays said its acquisition of Tesco Bank's retail banking business was expected to complete on 1 November 2024, bringing initial annualised net interest income of around £400m. HSBC Holdings announced on 22 October 2024 that from 1 January 2025 the group would operate through four businesses, one of which is a UK business, alongside Hong Kong, Corporate and Institutional Banking, and International Wealth and Premier Banking.
Asset quality: still benign
The share of major UK banks' loans in IFRS 9 stage 2, where credit risk has increased significantly since origination, fell from 10.2% in 2024 Q2 to 9.5% in 2024 Q3. That was a fall of 0.7 percentage points in a single quarter. Aggregate provisions fell to their lowest share of lending since the Covid pandemic, while provision coverage remained close to 1% of loans.
Mortgage arrears were 1.1% in 2024 Q3. The aggregate mortgage debt-servicing ratio fell slightly to 7.2% in June 2024 and was expected to rise modestly to around 8.0% by the end of 2026, lower than the 8.4% projected in the June FSR. Arrears on UK banks' consumer credit lending were 1.3% in 2024 Q2, broadly flat since Q1 and low by historical standards.
Arrears on commercial loans to SMEs rose from 1.2% in January 2024 to 1.4% in July. UK commercial real estate prices had fallen more than 20% from their 2022 peaks, although they had stabilised in recent quarters.
At bank level, Lloyds Banking Group recorded an underlying impairment charge of £273m in the nine months to September, giving an asset quality ratio of 9bp. This suggests impairments were only a light drag on that bank's earnings this year.
Capital and liquidity
Major UK banks and building societies had an aggregate CET1 ratio of 14.8% in 2024 Q2, broadly unchanged from 14.7% in Q1. Small and medium-sized UK banks and building societies had an aggregate CET1 ratio of 18.1%. The Financial Policy Committee (FPC) maintained the UK countercyclical capital buffer rate at its neutral setting of 2%.
At bank level, Lloyds Banking Group reported a CET1 ratio of 14.3% at 30 September, after 71bp for the interim dividend paid and the foreseeable dividend accrual, and capital generation of 132bp in the year to date. NatWest Group's CET1 ratio was 13.9%, 30bp higher than at the end of the second quarter. Barclays reported a group CET1 ratio of 13.8%, within its 13–14% target range. Santander UK's CET1 ratio rose to 15.4% in the quarter despite a 19bp impact from its motor finance provision. At group level, and therefore not a UK measure, Standard Chartered reported a CET1 ratio of 14.2%, above its 13–14% target range, after the full impact of the $1.5bn share buyback announced in July 2024.
In the supply shock scenario of the FSR's desk-based stress test, the aggregate CET1 ratio fell from 14.7% to a low of 10.4% in the second year, a drawdown of 4.3 percentage points, against an aggregate hurdle rate of 6.8%. In the demand shock scenario, it fell to a low of 11.3% in the second year, a drawdown of 3.4 percentage points, against a hurdle rate of 7.0%. The aggregate Tier 1 leverage ratio started at 5.4% and fell to a low of 4.6% in the first year of the supply shock, against a hurdle rate of 3.4%. At the low point, aggregate headroom over hurdle rates was at least £66bn in the supply shock and £75bn in the demand shock. The Bank also said it would move its main bank capital stress test, in which banks submit stressed projections, from an annual to a biennial frequency.
Bank of England desk-based stress test, aggregate results
| Measure | Starting point | Low point | Aggregate hurdle rate | Margin over hurdle at low point |
|---|---|---|---|---|
| CET1 ratio, supply shock | 14.7% | 10.4% (year 2) | 6.8% | 3.6pp |
| CET1 ratio, demand shock | 14.7% | 11.3% (year 2) | 7.0% | 4.3pp |
| Tier 1 leverage ratio, supply shock | 5.4% | 4.6% (year 1) | 3.4% | 1.2pp |
| Aggregate capital headroom at low point | – | – | – | £66bn (supply), £75bn (demand) |
Source: Bank of England, Financial Stability Report, November 2024, 29 November 2024.
Major UK banks' aggregate three-month moving average liquidity coverage ratio was 151% in September, with high-quality liquid assets (HQLA) of around £1.34tn. For small and medium-sized banks the ratio rose slightly to 269%, with £165bn of HQLA. The share of government bonds in major UK banks' HQLA rose from 21% in September 2023 to 29% in September 2024, while the share of central bank reserves fell from 60% to 50%. That is a shift of 8 percentage points towards gilts and 10 percentage points away from reserves in a year. Use of the Bank's Short-Term Repo facility had stabilised at around £40–50bn, up from around £30bn at the end of July and £5bn at the end of 2024 Q1. The pattern points to banks shifting their liquid assets from reserves towards gilts and making routine use of the Bank's repo facility.
Profitability: hedges cushion the turn in rates
The FSR reported that major UK banks earned underlying returns on tangible equity of 14.0% in 2024 Q3, around estimates of their cost of equity, with pre-provision profits of £16.2bn in the quarter. The FPC expected net interest margins to remain close to their long-run average, aided by hedging practices including the structural hedge. The FTSE 350 bank index had risen by around 11% since the June FSR, and major banks' price-to-tangible-book ratio was nearer to one.
Lloyds Banking Group's banking net interest margin rose to 2.95% in the third quarter from 2.93% in the second, as growth in structural hedge earnings more than offset deposit churn and asset margin compression. That was an increase of 2bp. Over nine months, underlying net interest income was £9.6bn, down 8%, with a banking net interest margin of 2.94%. Statutory profit after tax was £3.8bn for the nine months, against £4.3bn a year earlier. Return on tangible equity was 14.0% for the nine months and 15.2% in the third quarter.
NatWest Group reported attributable profit to ordinary shareholders of £1,172m in the third quarter and £3,271m for the nine months. Its return on tangible equity was 18.3% in the quarter and 17.0% for the nine months. Its net interest margin was 2.18% in the third quarter, 8bp higher than in the second, and 2.11% for the nine months. It said it now expected a return on tangible equity above 15% for 2024.
At Barclays, group profit before tax was £2.2bn in the third quarter, against £1.9bn a year earlier, with a group statutory return on tangible equity of 12.3%. Barclays UK's net interest margin was 3.34% in the third quarter, compared with 3.22% in the second and 3.04% a year earlier. That was a rise of 12bp on the quarter and 30bp on the year. Barclays raised its 2024 guidance for Barclays UK net interest income, which excludes the 2024 impact of the Tesco Bank acquisition, from around £6.3bn to around £6.5bn.
Santander UK's profit before tax fell to £143m in the third quarter from £413m in the second, a decline of £270m. It recognised a £295m provision in the quarter for historical motor finance commission payments, following the Court of Appeal judgment. The provision was larger than the quarter's profit before tax. Its banking net interest margin was 2.17%, up 8bp on the previous quarter. Profit before tax for the nine months fell to £947m from £1,731m a year earlier, a decline of around 45%. Return on tangible equity was 8.7% for the nine months, against 14.4% for 2023.
HSBC Holdings reported profit before tax of $8.5bn in the third quarter, up $0.8bn on a year earlier; this is a group-level figure, not a UK one. Standard Chartered reported a return on tangible equity of 10.8% in the third quarter, up 4 percentage points, also at group level rather than for the UK.
Selected bank results, third quarter of 2024
| Bank | Scope | Profit | Return on tangible equity | Net interest margin | CET1 ratio, 30 September 2024 |
|---|---|---|---|---|---|
| Lloyds Banking Group | UK group | £3.8bn statutory profit after tax (9M) | 15.2% (Q3) | 2.95% banking NIM (Q3) | 14.3% |
| NatWest Group | UK group | £1,172m attributable profit (Q3) | 18.3% (Q3) | 2.18% (Q3) | 13.9% |
| Barclays | Group; NIM is Barclays UK | £2.2bn profit before tax (Q3, group) | 12.3% statutory (Q3, group) | 3.34% Barclays UK (Q3) | 13.8% (group) |
| Santander UK | UK group | £143m profit before tax (Q3) | 8.7% (9M) | 2.17% banking NIM (Q3) | 15.4% |
| HSBC Holdings | Group-level, not UK | $8.5bn profit before tax (Q3, group) | – | – | – |
| Standard Chartered | Group-level, not UK | – | 10.8% (Q3, group) | – | 14.2% (group) |
Source: Lloyds Banking Group plc, Q3 2024 Interim Management Statement, 23 October 2024; NatWest Group plc, Q3 2024 Interim Management Statement, 25 October 2024; HSBC Holdings plc, Earnings Release 3Q24, 29 October 2024; Barclays PLC, Results announcement for the nine months ended 30 September 2024, 24 October 2024; Santander UK Group Holdings plc, Quarterly Management Statement for the nine months ended 30 September 2024, 20 November 2024; Standard Chartered PLC, Q3'24 Results, 30 October 2024.
Net interest margin, third quarter of 2024, %
Source: Lloyds Banking Group plc, Q3 2024 Interim Management Statement, 23 October 2024; NatWest Group plc, Q3 2024 Interim Management Statement, 25 October 2024; Barclays PLC, Results announcement for the nine months ended 30 September 2024, 24 October 2024; Santander UK Group Holdings plc, Quarterly Management Statement for the nine months ended 30 September 2024, 20 November 2024.
The results suggest that margins at the domestic banks widened in the third quarter even as Bank Rate fell, consistent with the FPC's view that hedging is holding margins near their long-run average. Santander UK's results show how quickly a single conduct provision can outweigh margin gains at an individual lender.
Regulation and conduct
On 12 September 2024 the Prudential Regulation Authority (PRA) published its second near-final policy statement on Basel 3.1, moving the implementation date by a further six months to 1 January 2026, with a four-year transitional period ending on 31 December 2029. The PRA estimated that Tier 1 capital requirements for major UK firms would be virtually unchanged by the package, with an aggregate increase of less than 1% from January 2030, when transitional arrangements end. The output floor is designed to ensure that risk-weighted assets of firms using internal models cannot fall below 72.5% of those derived under the standardised approaches. Lloyds Banking Group said it now expected the impact of Basel 3.1 to be modestly positive. NatWest Group expected an uplift in risk-weighted assets of around £8bn on 1 January 2026. The contrast suggests the package will matter more for individual balance sheets than for the system's aggregate capital requirement.
Alongside the Basel 3.1 statement, the PRA consulted, in CP7/24, on a simplified capital regime for Small Domestic Deposit Takers, proposing an implementation date of 1 January 2027; the consultation closed on 12 December 2024. In macroprudential policy, the FPC recommended to the PRA and the FCA that the de minimis threshold of the loan-to-income flow limit be indexed to nominal GDP growth since 2014, so that the limit would apply only to lenders extending more than £150m of residential mortgages a year, rather than £100m.
On 25 October 2024 the FCA said it noted the Court of Appeal judgment in three motor finance commission cases involving Firstrand Bank and Close Brothers. The FCA said the judgment related to fixed commission in motor finance agreements as well as to discretionary commission arrangements, which it banned in 2021. Lloyds Banking Group said on 28 October that the decisions set a higher bar for the disclosure of, and consent to, commission than had been understood across the motor finance industry, and that it was assessing the potential impact. In September the FCA had extended the pause on the deadline for firms to respond to complaints about discretionary commission until 4 December 2025. On 13 November it said it would consult on extending the time firms have to respond to complaints where a non-discretionary commission was involved. Santander UK's £295m provision and 19bp CET1 impact give one measure of the cost for a single lender.
Outlook and risks
The MPC has said a gradual approach to removing policy restraint remains appropriate, and its November projection had CPI inflation rising to around 2¾% by the second half of 2025, with the Autumn Budget expected to add to both activity and inflation. This points to a gradual easing path rather than rapid cuts. The FPC expected net interest margins to remain close to their long-run average. Lloyds' third-quarter results show the forces at work: structural hedge earnings more than offset deposit churn and asset margin compression.
The mortgage debt-servicing ratio was expected to rise modestly to around 8.0% by the end of 2026, while SME arrears had edged up and commercial real estate prices remained more than 20% below their 2022 peaks. Quarterly GDP growth was 0.1% in the third quarter. This suggests credit risk is contained on current evidence but not uniform, and a weaker growth path would test these segments first.
The desk-based stress test left aggregate headroom of at least £66bn over hurdle rates, and the PRA expects Basel 3.1 to leave Tier 1 requirements for major firms virtually unchanged. This suggests capital is not the binding constraint. The open regulatory and legal questions are the FCA's proposed extension of the time firms have to respond to motor finance complaints where a non-discretionary commission was involved, the pause on discretionary commission complaints running to 4 December 2025, and the bank-by-bank effects of Basel 3.1 from 1 January 2026. On balance, the sector enters 2025 with returns around its cost of equity and buffers that the Bank's own stress test shows to be substantial.
What to watch
- 1 January 2025: HSBC Holdings moves to a four-business structure that includes a UK business (a group-level reorganisation).
- Over the 12 months from October 2024: the MPC's planned £100bn reduction in its gilt holdings, to £558bn.
- 4 December 2025: end of the FCA's extended pause on the deadline for responding to discretionary motor finance commission complaints.
- 1 January 2026: Basel 3.1 implementation date in the UK; NatWest Group expects a risk-weighted asset uplift of around £8bn on that date.
- 1 January 2027: proposed start of the PRA's simplified capital regime for Small Domestic Deposit Takers.
- 31 December 2029: end of the Basel 3.1 transitional period.
Primary sources: Bank of England, Monetary Policy Summary and minutes, meeting ending 6 November 2024, 7 November 2024; Bank of England, Monetary Policy Summary and minutes, meeting ending 31 July 2024, 1 August 2024; Bank of England, Monetary Policy Summary and minutes, meeting ending 18 September 2024, 19 September 2024; Bank of England, Monetary Policy Report, November 2024, 7 November 2024; Bank of England, Financial Stability Report, November 2024, 29 November 2024; Bank of England, Financial Stability Report, June 2024, 27 June 2024; Bank of England (Prudential Regulation Authority), second policy statement on Basel 3.1, news release, 12 September 2024; Office for National Statistics, GDP first quarterly estimate, UK: July to September 2024, 15 November 2024; Office for National Statistics, Consumer price inflation, UK: October 2024, 20 November 2024; Bank of England, Money and Credit, September 2024, 29 October 2024; Bank of England, Money and Credit, October 2024, 29 November 2024; Lloyds Banking Group plc, Q3 2024 Interim Management Statement, 23 October 2024; NatWest Group plc, Q3 2024 Interim Management Statement, 25 October 2024; Lloyds Banking Group plc, Motor Finance Update, 28 October 2024; HSBC Holdings plc, Earnings Release 3Q24, 29 October 2024; Barclays PLC, Results announcement for the nine months ended 30 September 2024, 24 October 2024; Santander UK Group Holdings plc, Quarterly Management Statement for the nine months ended 30 September 2024, 20 November 2024; Standard Chartered PLC, Q3'24 Results, 30 October 2024; Bank of England, Credit Conditions Survey, 2024 Q3, 10 October 2024; Office for National Statistics, Labour market overview, UK: November 2024, 12 November 2024; Financial Conduct Authority, statement on Court of Appeal judgment in Hopcraft, Johnson and Wrench, 25 October 2024; Financial Conduct Authority, FCA to consult on extending the time motor finance firms have to handle commission complaints, 13 November 2024.
Cover illustration: AI-generated