With Q3 earnings season in full swing, the big four UK banks reported healthy financials and profits for the third quarter over the past few weeks. But continued uncertainty was a steel thread that ran through presentations and earnings calls with margin pressure and customer deposit flows among the concerns heading into 2024.

Here are our key themes across the big four banks Q3 results:

Theme 1: Performance Against Profit Estimates Split The UK Banks In Two - But Didn't Paint The FUll Picture

Lloyds Banking Group (LBG) and Barclays beat analysts’ forecasts in Q3, but their results weren’t entirely positive.

• LBG’s pre-tax profit slightly exceeded analysts’ expectations of £1.8 billion at £1.9 billion largely driven by net interest margins.
• Barclays also performed better than expected but pre-tax profits still dipped in Q3 compared to Q2.

While HSBC and NatWest both missed analysts’ forecasts, this didn't tell the full story.

• HSBC’s pre-tax profit more than doubled in Q3 year-over-year thanks to interest rate hikes.
• NatWest’s pre-tax profits for Q3 were larger than the same period last year.

Theme 2: Bank And Market Sentiment Is That The Net Interest Margin Impact Has Peaked

It’s no secret that interest rate hikes have hugely boosted UK lenders’ profitability over the past year – and while net interest income remains a significant profit driver, the consensus is that its impact is starting to wane.

UK banks’ results and earnings calls uncovered more pessimistic outlook for net interest margins (NIM).

• Barclays UK and NatWest both cut their full-year outlook for its NIM for 2023.
• LBG and HSBC NIM both declined slightly compared to Q2.

UK banks are being forced to offer more generous savings rates to their customers which is increasing the cost of funding and hurting their margins in the short-term.

• NatWest’s CEO Paul Thwaite highlighted the trade-off in retaining deposits in the bank’s Q3 management presentation Q&A: “...in a competitive market environment, we have taken the decision to compete...(and) this comes at a cost in the near-term,” referencing the launch of a new fixed rate savings product for retail customers in Q2.
• While LBG’s CFO William Chalmers acknowledged the increased cost of holding deposits “...when a deposit moves from instant access to fixed term for example or for that matter from PCA into savings” in LBG’s Q3 presentation Q&A.

Theme 3: Controlling Costs Is A Priority Heading Into 2024

Maintaining tight cost discipline is high on the agenda for UK banks likely due to potential headwinds from mortgages and deposits pricing on the horizon alongside continued uncertainty.

• Barclays outlined it was “evaluating actions to reduce structural costs” in the near-term due to margin pressure.
• LBG, NatWest, and HSBC all flagged cost management as a crucial focus.

What's Ahead For UK Banks?

Theme 1: Banks Will Be Closely Monitoring Customer Deposits As Competition Remains Fierce, And FOcus On ROlling Out Data-Driven Strategies To Avoid Outflows

• There’s consensus that competition won’t ease going into 2024 as digital challengers and incumbent have both increased savings rates.
• Banks are further incentivised to compete for deposits as they have to start repaying the Bank of England funding used to finance emergency loans early next year.
• UK banks will continue to fight for customer deposits with more competitive savings products to fill this funding shortfall and also avoid outflows.
• They will likely also focus on other longer-term tech-enabled strategies.
• LBG talked up its investment in its digital “customer contact strategies... (that) identify where customers might move, how they might move, what it is they are looking for...” in its Q3 presentation.
• Banks will leverage data and AI to better understand their customers to personalise their experience and improve satisfaction to ultimately reduce churn.
• This will also address another key priority in better supporting customers by providing tailored budgeting advice, for example, and also identifying vulnerable customers in need of support.

Theme 2: With Cost Control High On The AGenda, UK Banks Will Lean HEavily Into Digitisation To Drive Operational Efficiencies

• NatWest highlighted technology's role in “...delivering the outcomes we set out earlier this year, simplification (and) digitisation” to drive efficiencies in its Q3 presentation.
• Banks have opportunities to find further cost savings through greater cloud adoption by reducing fixed costs.
• While generative AI has the potential to greatly increase productivity of their workforces.

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’ve helped banks build a deeper understanding of customers with data-driven strategies and also migrate to, and further adopt, the cloud:

• 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 expertise in banking. You can also click here to learn more about our work.