UK banks’ profits fared well in 2023 as higher interest rates fuelled net interest income (NII) growth. Yet Q4 figures showed NII has peaked, and UK banks struck a less optimistic tone with regards to their growth prospects for 2024 in their earnings calls.

Here's a look at the big four banks’ 2023 results viewed through the key themes of profits, NII, and customer deposits.

1. Annual Profits (largely) Up But Down in Q4

NatWest recorded its largest annual profit since 2007 although its Q4 profits fell.

• NatWest’s pre-tax profit jumped 20.4% to £6.2 billion in 2023.
• Quarterly profits dipped year-over-year (YoY) by 11.9% and quarter-over-quarter (QoQ) by 5.6% to £1.26 billion.

Lloyds Banking Group’s (LBG) pre-tax profits surged YoY but declined QoQ.

• LBG recorded a 57% jump in annual profits to £7.5 billion.
• Quarterly profits (£1.7 billion) grew YoY but fell QoQ £1.7 billion.

Barclays’ £925 million restructuring costs took the shine off its 2023 results.

• Its pre-tax profit of £6.6 billion - including restructuring costs deductions - was lower than in 2022.
• While profit for Q4 was just £0.1 billion including deductions.
• But its plans for a strategic overhaul were well-received as its share price increased by 6% on the day of its announcement.

HSBC scored a record annual profit last year but the $3 billion (£2.3 billion) impairment charge saw its Q4 profits plunge.

• Its pre-tax annual profit jumped by nearly 80% to £24 billion.
• Its quarterly profit went the other way nosediving by around 80% to £793 million due to the write-down charge from its stake in China's Bank of Communications.

2. Comparing NII On A Yearly And Quarterly Lens Indicates Leaner Times COuld Be Ahead

While UK banks raked in profits from improved net interest margins (NIM), margins slimmed in Q4 as customers moved their money into savings products – with their bank or elsewhere - to profit from higher interest rates.

• NatWest's NII rose 12% to £11 billion YoY and its net interest margin (NIM) grew to 3.04% from 2.85%. Yet its NIM fell eight basis points to 2.86% in Q4 QoQ.
• LBG’s NII increased by 5% to £13.3 billion in 2023 and its NIM grew by 17 basis points to 3.11%. Yet its NIM constricted by 0.1% to 2.98% in Q4 from Q3
• Barclays NII jumped 20% to £12.7 billion in 2023, from a 44 basis point NIM increase to 3.98%. But its NIM was down 15 basis points compared to Q3.
• HSBC’s NIM increased by 24 basis points to 66% but fell 18 basis points in Q4 QoQ.

3. Customer Deposits Flows Stabilised Towards The End Of 2023

UK banks noted how customer deposits were less rocky in their Q4 earnings transcripts after higher rates of outflows earlier in the year.

• LBG’s Chief Financial Officer William Chalmers surmised: “Deposit churn appears to be slowing. In the fourth quarter, retail current accounts were down £1.9 billion compared to £3.2 billion in Q3.”
• While Barclays’ Group Finance Director Anna Cross noted how “customer migration really slowed down.”
• While UK banks also saw customers move funds into their higher-paying fixed-rate and instant access savings products to partially offset deposit outflows but in turn, narrowing NIM.

What's Ahead For UK Banks In 2024 And Beyond?

UK banks struck a somewhat cautious - and in some cases, gloomy - tone for their 2024 outlook due to a combination of an uncertain economic outlook, subdued lending demand, and expected interest rate cuts.

• NatWest forecast that its total income will drop in 2024 by around a £1 billion and lowered its return on tangible equity outlook to 12% for 2024 from 17.8% in 2023.
• LBG predicted a NIM of 2.9% for 2024 down from 3.11%.
• Barclays’ Anna Cross also forewarned “downward pressure on the balance sheet coming from both deposits and mortgages.”
• While HSBC forecast lower NII due to expected rate cuts from the Bank of England.

How Will UK Banks Navigate Choppy Waters?

UK banks will point their technology spend towards cost optimisation and improving customer experience to deliver more efficient and targeted growth.

Technology-Enabled Cost Optimisation

UK banks are all in on cost savings delivered through digitising customer journeys, streamlining processes, and productivity boosters.

A key pillar in delivering NatWest’s key priority of tight cost control is digital-enabled simplification. This will include digitising customer journeys, legacy modernisation, and AI-powered increased productivity.

HSBC paid testament to the importance of technology in achieving cost discipline and facing inflationary headwinds. Group CEO Noel Quinn highlighted how HSBC will “continue to invest in the digitisation of our business to drive incremental efficiencies.”

Building Deeper Understanding Of Customers

While building out their data and AI capabilities in order to better understand customers and deliver the personalisation they crave is top of mind for UK banks.

Barclays’ Group CEO C.S. Venkatakrishnan spoke candidly about the necessity for Barclays to “improve our customer experience... we aim to improve the customer experience by investing in it deeply, and making it... a point of pride.”

NatWest’s new CEO Paul Thwaite highlighted how it is “using (data) insights to understand and react to customer behaviour as the environment evolves.” While LBG’s CEO Charlie Nunn spoke of how the bank have “used our data insights to contact around 7.5 million customers offering support where required.”

Three months into the New Year, it’s clear that the extreme uncertainty of the last few years clouding the UK banking sector of the past few years remains firmly in place in 2024. Innovative banks will face these pressures head on by leveraging data, AI, and the cloud to become leaner and data-driven organisations.

How Can BJSS Help?

BJSS works with leading players across the banking ecosystem, and we have industry leading approaches to helping organisations become data-driven, including:

• Lean Data is our proprietary approach to delivering successful data projects that creates a single version of truth and aligns business and IT stakeholders.
• Customer Insights accelerates customer experience transformations by unlocking accurate, unified, and timely customer insights.

We also help banks to drive operational efficiencies through legacy modernisation, cloud adoption, and enhanced data-driven decision-making.

• We helped a global retail bank to modernise its legacy mortgage platform.
• We helped a top four UK bank to accelerate the delivery of data science capabilities to drive business decisions.
• We helped a leading UK bank with call centre optimisation using intelligent automation.
• We supported a leading UK bank in the early stages of its cloud adoption to cut the lead time for provisioning public cloud environments from weeks to hours.
• We enabled a top four UK bank to build a platform for scalable machine learning adoption.

Want To Know More?

We regularly hold sessions with banks on the best way to leverage digital solutions to drive operational efficiencies and gain a better understanding of customers. Get in touch if you’d like to know more about data-driven personalisation, the cloud, or our other areas of tech expertise in banking.