Financials Unshackled Issue 44: A Review of UK & Irish Banks 1Q Results (and more)

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Welcome to the latest issue

Welcome to Financials Unshackled Issue 44, which covers the recent round of UK & Irish bank results and the note is structured as follows: i) overarching key UK themes through 1Q results season; ii) overarching key Irish themes through 1Q trading updates; iii) UK domestic banks results review (covering Barclays, Lloyds Banking Group, NatWest Group, Santander UK Group Holdings, and OSB Group); iv) UK / Asian banks results review (covering HSBC, Standard Chartered); v) select UK unlisted banks results review (covering Allica, Revolut, Tandem, Zopa); and vi) Irish banks results review (covering AIB Group, Bank of Ireland Group, PTSB, and Avant Money). I also pick up on relevant recent key newsflow with respect to the above companies within this note. A separate Issue 43 landed in your inboxes on Monday 5th May, which picks up on select recent developments in a UK / Irish / Global banking context since Issue 42 was published in early April.

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Note that I am in London from Monday 12th through Thursday 15th May with some availability - please send an email to john.cronin@seapointinsights.com if you would like to catch up in person.

Overarching Key Themes - UK

1. Lending and deposit growth continue to expand (retail lending considerably stronger than business lending growth, with particularly strong growth in mortgage lending in 1Q ahead of the stamp duty regime changes). Prognosis amongst the bank executives is for growth in both lending and deposits to continue - with some pullback in mortgage lending in 2Q vs. 1Q (though approval volumes remain strong).

2. Net interest margin accretion evident through 1Q and favourable deposit volume trends as well as structural hedge contributions underpin confidence in continued uptick. Deposit churn trends continue to improve. Asset margin compression continues to be a feature. Notably, mortgage completion spreads a notch over 70bps in 1Q but tightening marginally under quite competitive conditions.

3. No signs of deterioration in credit quality but a tone of caution prevails in terms of the second order impact of tariffs - some top-up overlay provisions booked in 1Q ‘to get ahead’ of adverse macroeconomic assumption changes.

4. No news on motor finance debacle - Supreme Court judgment expected mid-July. FCA will then have up to six weeks to determine path forward so it is unlikely we will have any greater clarity on likely end-state provisioning requirements at 2Q.

5. TNAV growth will continue owing to: i) profit build; ii) cash flow hedge reserves unwinding; and iii) share count reduction due to buybacks.

6. Guidance largely reaffirmed with some revenue / RoTE upgrades. No downgrades.

Overarching Key Themes - Ireland

1. Continued strong financial performance in 1Q - in line with expectations (NII declined as expected owing to lower average official rates).

2. Strong growth in non-interest revenues evident.

3. Cost growth contained as inflation has moderated.

4. Positive messages on credit quality - AIBG and PTSB still carry a significant stock of PMAs within their ECL provisions and a very high degree of coverage versus European peers (e.g., both banks have coverage of 6.6% on Stage 2 loans).

5. Capital strength across all three banks - it seems likely AIBG will commence interim distributions at 1H25.

6. FY25 guidance reaffirmed in all cases; medium-term targets intact. Material upside to AIBG’s medium-term RoTE target.

7. While all banks acknowledged the changed external environment, BIRG management spent most time on this - issuing a reasoned tone of caution in terms of domestic macroeconomic risks, while marrying up those messages with how the bank is resilient in the context of the evolving backdrop. In overall tone terms, it felt like it was AIBG’s turn to be the most bullish - possibly with the AGM vote in mind.

UK Domestic Banks Results Review

Covering Barclays (BARC), Lloyds Banking Group (LLOY), NatWest Group (NWG), HSBC UK, Santander UK Group Holdings (SAN UK), OSB Group (OSB)

BARC 1Q25 results - 30th Apr

Note that BARC’s base case macroeconomic assumption is for a UK base rate of 3.75% at end-FY25 and 3.50% at end-FY26

Results / Outlook Synopsis:

• BARC printed a strong set of numbers for 1Q25 with reported profit after tax (PAT) of £2.10bn coming in 8.3% ahead of consensus expectations* and a RoTE of 14.0% vs. consensus for 12.9% (despite a higher tangible equity position than consensus expected).

• The ‘beat’ was a function of better-than-expected income performance with total income of £7.71bn coming in 4.3% ahead of consensus expectations - owing to NII (ex-IB and Head Office) outperformance (1.1% ahead), Other NII outperformance, and, most particularly, non-interest revenue outperformance (4.8% ahead) supported by a very strong quarter for the Markets business (trading revenues in Markets more than offset Investment Banking revenue weakness).

• Elsewhere, total costs were in line with consensus (though ‘regular opex’ excl. bank levy and litigation/conduct charges was 0.8% higher than expected), the credit impairment charge of £643m was above consensus for £547m mainly due to an incremental post-model adjustment of £74m, and the tax charge of £621m was £72m above consensus.

• Management revised up FY25 NII guidance from c.£12.2bn to >£12.5bn on the back of favourable deposit volumes and mix and preserved all other FY25 guidance - including the c.11% RoTE guidance despite the 1Q ‘beat’ and the FY25 NII upgrade. The medium-term (FY26) targets have been retained and a confident tone was conveyed in terms of achievability and sustainability beyond FY26 - in particular, from an income perspective with structural hedge income momentum expected to continue into FY27 (see below).

* Based on company-compiled consensus data as at 23rd April

Perspectives on Key Focus Themes:

1. FY25 RoTE Guidance preservation: Frankly unsurprising that it hasn’t been upgraded at this early stage of the year despite the supportive mathematics of the NII upgrade - and, given the guidance is struck at c.11% rather than precisely 11.0%, it would take a lot to move up by a full percentage point. Although we got a 1Q ‘beat’ and an income upgrade - and while YTD momentum is favourable - I would still expect the pre-1Q25 consensus RoTE to remain at the 10.8% level - reflecting higher income offset by marginally higher opex, marginally higher credit impairment charges, a marginally higher tax charge, and higher average tangible equity. Risks to this view are slightly biased to the upside as I see it - where it could inch up to around 11.0%, especially given consensus is already modelling a year-end CET1 capital ratio print of 13.9%, towards the top end of management’s stated target range.

2. Well positioned to cope with adverse changes in external environment: Management emphasised the strength of the diverse income mix in an overall business resilience context, reiterated that it is allocating more capital to the higher-returning UK businesses and improving returns in the lower-returning businesses (USCB, IB), and noted that this positions BARC well to cope with any slowdown in transactional and lending income build, for example.

3. Structural hedge income visibility has improved: BARC locked in hedging reinvestment contracts at a higher rate than had been assumed (3.5%) on a stable hedge notional (with forward guidance for the hedge notional to remain stable). Management further noted that, owing to continued deposit volume and mix strength, BARC now expects to reinvest c.90% of maturing hedges during FY25 and FY26 vs. 75% previously - and continues to assume a 3.5% reinvestment yield (notably, the 3Y swap rate (the weighted average duration of BARC’s structural hedges is c.3 years) is 3.83% at the time of writing on 6th May).

4. Incremental PMA provision charge a bid to ‘get ahead’: BARC’s 1Q credit impairment charge of £643m compares to consensus expectations for £547m and equates to a cost of risk (CoR) of 61bps, which is slightly above the guided through-the-cycle range of 55-60bps. However, this charge included a £74m top-up via a post-model adjustment (to reflect increased probability weightings of downside scenarios in the IFRS 9 models) - and stripping this element out would get you back to a charge of £569m for the quarter (or a CoR of c.54bps), which is just marginally above consensus. Consensus is modelling a FY25 provision charge of £2.20bn (averaging £550m per quarter - in line with the consensus estimate of £547m for 1Q) - and while this looks like it has drifted up a bit in recent weeks, I suspect it will push up a little bit further. The results documentation is clear that trends across BARC’s portfolios do not currently show signs of deterioration and Venkat sought to explain the PMA charge as a bid to get ahead of impending changes to consensus US economic forecasts, accelerating coverage build.

5. IB RWA proportionality: IB RWAs were broadly stable q/q excl. FX and remained at 56% of Group RWAs at end-1Q25 “despite the higher income and usual Q1 seasonality” (for example, IB RWAs were +£3.1bn q/q in 1Q24 which was attributed to “Expected seasonal client activity”). Management fielded a question on the expected implications for IB RWAs proportionality in response to the delay to Basel 3.1 implementation timing and the associated RWA growth, which the CEO batted away by noting that the IB getting to 50% of Group RWAs may happen at the beginning of FY27 rather than at the end of FY26, which seems a fair response and reaffirms the medium-term target (let’s not fall out over one calendar day!). However, it is clearly possible that we see further delays to Basel 3.1 implementation or indeed a further dilution of its expected impacts - while that might mean that IB RWAs as a percentage of Group RWAs come in slightly above 50% at the end of FY26 or the beginning of FY27 it would be a ‘good news story’.

6. CET1 target range: BARC printed an end-1Q25 CET1 capital ratio of 13.9%, which management notes is intentionally towards the top end of BARC’s 13-14% guidance range - as was effectively guided at the stage of the FY24 results with an expected increase in MDA in mind (which has now manifested). Indeed, FD Anna Cross noted on the earnings call that “it’s not inconceivable that we might go through the top end of that range” while making it clear that there is no change to the guidance for distributions to be progressive in FY25. CEO Venkat also added that it should not be surprising to see BARC “on the general side of prudent” in a capital deployment context - which seems sensible given greater global macroeconomic uncertainties. All in all, I expect that the consensus view will remain broadly unchanged - i.e., that BARC will operate at the top end of its target range for the foreseeable future.

Other Recent Company News of note:

• BARC issued a RNS on 2nd May noting that: i) Stephen Shapiro (Group General Counsel) disposed of 400,000 shares in BARC at a price of 295.9p per share on that same date (through a nominee account), netting him gross proceeds of almost £1.2m; and ii) Taylor Wright (Global Co-Head of Investment Banking) disposed of 274,122 shares in BARC at a price of 294.9p per share on that same date (through a nominee account), netting him gross proceeds of c.£800k.

• Investors Chronicle deep dive on BARC of 14th April available here.

LLOY 1Q25 results - 1st May

Note that LLOY’s base case macroeconomic assumption is for a UK base rate of 4.00% at end-FY25 and 3.50% at end-FY26

Results / Outlook Synopsis:

• LLOY issued a positive update for 1Q25 with reported profit after tax (PAT) of £1.13bn coming in 2.0% above consensus expectations* - and a reported RoTE of 12.6%, which was an inch ahead of consensus for 12.5%. However, on an underlying (u/l) basis, profit before tax (PBT) of £1.52bn was 3.6% behind expectations.

• In terms of explaining the ‘miss’ relative to u/l PBT expectations, there are a few moving parts to flag: i) NII was £35m or 1.1% ahead of consensus (while NIM of 3.03% was +6bps q/q and 6bps ahead of consensus); ii) OOI was £16m or 1.1% behind consensus; iii) the operating lease depreciation charge was £16m or 4.7% above consensus; iv) operating costs were 3.6% or £89m higher than consensus; v) remediation costs were nil versus consensus for £59m; and vi) the impairment charge of £309m was £30m above consensus. It’s also worth noting that the end-1Q25 CET1 capital ratio of 13.5% was a notch below consensus for 13.6% but a temporary increase in RWAs of c.£2.5bn, which is expected to fully reverse by end-3Q, explains the delta.

• The CFO William Chalmers clearly explained the outcome relative to expectations, with the following points being of particular note: i) strong NII performance in 1Q reflective of positive momentum and expects NIM to continue to accrete through the course of FY25 but felt it was too early in the year for an upgrade here; ii) deep confidence in FY25 OOI guidance despite the marginal ‘miss’ in 1Q; iii) LLOY working on mitigants to contain the operating lease depreciation charge and will review fleet valuations as is customary at 2Q; iv) £200m of the expected c.£280m FY25 severance costs charge were deliberately taken in 1Q to accelerate the associated cost efficiencies - and management expects the CIR to track down through the course of FY25; v) FY25 remediation costs guidance retained despite a nil 1Q charge; and vi) the impairment charge (CoR 27bps) incorporates a net Multiple Economic Scenario charge of £35m (more detail below) and, stripping this out, would have seen an impairment charge of £274m (which would have been broadly in line with consensus) / CoR of 24bps.

• FY25 guidance and FY26 medium-term targets were reaffirmed in full. In response to a question in relation to confidence levels in revenue guidance, the CFO noted that he is “very comfortable” with the FY25 NII guidance, the >15% FY26 RoTE guidance and the >200bps of capital generation guidance for FY26. He further noted that part of what underpins this confidence is the fact that 90-95% of the structural hedge contribution for FY25 is already locked in - with 80%+ of the FY26 contribution locked in too. My sense is we will not see a material shift in consensus expectations for FY25 RoTE (11.8%) and FY26 RoTE (15.5%) on the back of this update (I see some accretion in NII estimates largely offset by slightly higher costs and impairment charges).

• * Based on company-compiled consensus data as at 14th April

Perspectives on Key Focus Themes:

1. Deposit build strong - and outlook positive: LLOY reported £5.0bn of deposits growth in 1Q25 (+1% q/q) with strong growth in both retail and commercial balances and Chalmers noted that LLOY expects deposit performance to be “good” through the remainder of FY25, moving “in the right direction”. There was a debate as to whether or not to upsize the structural hedge notional at 1Q but the decision taken was to hold fire and wait to see how everything develops - but the CFO remarked that the expectation is that the hedge will increase over the course of the remainder of FY25, albeit “not by a huge amount”. This presents prospective NII upside for FY26 and beyond that I suspect is not fully captured in consensus - and probably won’t be fully captured until LOY takes action to upsize the hedge.

2. Mortgage completion spreads narrowing marginally: The CFO noted that mortgage completion spreads were down marginally q/q in 1Q to just over 70bps but that LLOY is seeing a bit more competition in the context of spreads for 2Q and potentially beyond. Indeed, we have seen average fixed rates fall back to a greater extent than the reductions in swap rates in recent weeks. In overall terms this dynamic is unlikely to have a marked impact on target NII delivery as some caution is likely baked into the plan anyway and we are not seeing the sort of competition that appears likely to drive spreads materially south.

3. Credit quality remains resilient; net MES charge to ‘get ahead’: Positive messaging on asset quality - new to arrears low and stable, with continued improvement in some segments like mortgages; and early warning indicators remain benign. The 1Q base case assumptions incorporate “a level of” tariffs and an incremental £100m charge was booked to reflect the risk that the potential impact from tariffs could be more severe than the base case assumptions following ‘Liberation Day’ news (note that the net MES charge was just £35m as there were offsets to the £100m in the form of improved HPI and wage growth benefits). The CFO also noted: i) only very modest and highly rates parts of LLOY’s commercial business are directly exposed to the US; and ii) c.1% of loans relate to exposures to US exporters - which are typically exposures to large investment grade companies for whom tariffs are likely to represent an earnings issue rather than something more serious. LLOY holds a stock of ECLs on its Balance Sheet of £3.7bn, which is c.£450m above base case - and the £100m MES charge, on top of the inclusion of tariff impacts within the base case, suggests a significant level of prudence on a relative basis here.

4. Unlikely to have more clarity on motor finance provisioning at 2Q: Assuming that the Supreme Court judgment in relation to the appeal cases taken in early April comes in July (which is the consensus expectation - and, notably, Compliance Corylated reported here on 7th April that Lord Reed, President of the Supreme Court, said the Court aimed to provide its decision by mid-July), it is unlikely that LLOY will be in a position to significantly refine its current best estimate of required provisions of £1.15bn. This is because we will need to await the FCA’s interpretation of the Supreme Court decision, which will take up to six weeks post-judgment - with analytical work to follow the FCA’s determinations.

5. Organic strategy the key focus: Chalmers repeated prior comments in relation to M&A appetite, i.e., there are three criteria to fulfil before something would be taken forward: i) needs to add scale and/or capability incremental to the organic alternative; ii) needs to deliver more speedily than the organic alternative would; and iii) needs to deliver at a level of risk that is lower than the organic alternative. He did note that a lot has ‘crossed the desk’ over the last year or so but that these three criteria were not fulfilled. Still though, hopes for a wave of banking M&A after some regulatory clarity (motor, MREL, ringfencing, etc.) later in the year remain high in the City.

NWG 1Q25 results - 2nd May

Note that NWG’s base case macroeconomic assumption is for a UK base rate of 3.75% at end-FY25

Results / Outlook Synopsis:

• NWG delivered a very strong beat relative to consensus expectations* for 1Q25, with reported profit after tax (PAT) of £1.34bn coming in 17% ahead of consensus - and a RoTE print of 18.5%, coming in 270bps above the consensus expected RoTE of 15.8%.

• In terms of dissecting the ‘beat’, the following are noteworthy: i) total income of £3.98bn was 3.7% ahead of consensus expectations (NII of £3.03bn was 1.3% ahead - with NIM coming in at 227bps, 4bps higher than consensus; and OOI of £954m was 12% ahead); ii) operating expenses of £1.98bn were 5.9% lower than consensus expectations - reflecting u/l opex of £1.94bn coming in 5.3% below consensus and a £44m litigation & conduct charge versus consensus for £61m; and iii) in the other direction, the impairment charge of £189m (CoR: 19bps) was £20m above consensus and the tax charge of £471m compared to consensus for £420m. The net impact of the income and cost beats was a CIR of 48.6%, almost a full 5pps below consensus for 53.2%.

• The CFO Katie Murray cautioned on the earnings call not to extrapolate the 1Q performance in an OOI and a costs context as a run rate. On costs specifically, the CFO noted on the earnings call that the cost profile can be lumpy and that annual wage awards (3.3%) and higher NICs will both take effect from 1st April - and that the £7m of 1Q Sainsbury’s Bank-related integration costs will increase from 2Q onwards (£100m guided for FY25 in total).

• The strong 1Q performance has driven an early upgrade to total income guidance - with prior guidance for FY25 total income of £15.2-15.7bn refreshed to the upper end of that range (notably, consensus was for £15.8bn prior to the publication of the 1Q update). Similarly, management is now guiding that FY25 RoTE will be at the upper end of the original 15-16% guidance range (notably, the pre-1Q consensus was for 16.5%). All in all it seems that consensus is primed for a further meaningful upward shift, predominantly on income grounds (NII and OOI) despite the fact that it was already materially ahead of guidance prior to the 1Q update.

• * Based on company-compiled consensus data as at 23rd April

Perspectives on Key Focus Themes:

1. Positive messaging on deposits: Consistent with peer domestic UK banks, NWG saw further deposit volume build in 1Q (+£2.1bn, or +0.5% q/q) with growth in non-interest-bearing deposits seen in the quarter. The CFO noted on the earnings call that management expects deposit growth to continue, in line with NWG’s economic data assumptions. Murray further noted that, because of the way in which the structural hedge sizing is calibrated (based on a 12M lookback), given the growth in non-interest-bearing deposits that has been observed, it is possible that the product hedge will be upsized later in FY25 (though guidance is for ‘pretty stable’). To the extent that this were to manifest it would present some further upside to NII consensus, particularly in outer years.

2. Unsecured lending portfolio to benefit from Sainsbury’s Bank acquisition: Following the completion of the Sainsbury’s Bank acquisition on 1st May, management spent some time on the call running through the expected FY25 financial impacts, Firstly, to recap, it adds c.1 million new customer accounts - c.£2.5bn of unsecured lending and c.£2.7bn of savings. It is expected to drive incremental revenues of c.£100m in FY25, which will be offset by integration costs of c.£100m - and a Day 1 ECL charge of c.£80m. While this was clearly a sensible acquisition given the immediate balance build (and associated income streams), a question came up later on the call in relation to prospective synergies - with the CFO noting that NWG has the ability to penetrate those customers with more products, services, etc. and that “we have the potential to think about the proposition and targeted offers using loyalty and Nectar points, but we'll be very targeted and thoughtful about that and make sure it drives customer value and utility”. There is further prospective earnings upside accruing from this acquisition if management integrates well and takes advantage of the opportunities that the Sainsbury’s Bank customer base presents for NWG.

3. Reassuring message on asset quality: Similar to peers, NWG notes that there has been no evidence of any underlying deterioration in the credit portfolio and that management has no significant concerns at this time. Management took the decision to maintain PMAs despite the fact that the book’s performance implied a small release was appropriate. Specifically, the PMAs stood at £333m at end-1Q of which £305m reflects a provision for economic uncertainty.

4. A few other items of note: There were a few other items to flag from the earnings call: i) similar to peers, NWG is guiding that the cash flow hedge reserve is expected to fully unwind over the next two years consistent with previous guidance) but that this is not fully captured in consensus estimates; and ii) the costs of the November and March AT1 issuances are not fully reflected in consensus; and iii) AT1 accounts for 3.2% of total capital versus a regulatory requirement of 2.1%, a reflection of the early issuance that NWG undertook in order to take advantage of receptive market conditions - it would seem likely that some large calls will ensue in a bid to optimise further the capital stack. Notably, Donal Quaid, Group Treasurer, said on the fixed income investor call following the FY24 results on 14th February last that two of AT1 securities outstanding, with a total nominal of $2.65bn, have their first call periods commencing in 2H25. To the extent that management does optimise significantly here, it represents further upside to consensus RoTE - based on the AT1 costs trajectory embedded in consensus.

Other Recent Company News of note:

• NWG issued a RNS on 1st May noting that Treasury’s shareholding in NWG fell to just 1.98% (previously disclosed shareholding: 2.99%) following a transaction on 30th April.

SAN UK 1Q25 results - 30th Apr

Notable Take-Aways (Santander UK Group Holdings plc results):

• RoTE of 12.4% delivered in 1Q - which compares favourably to the FY24 8.8% RoTE print due to no further provision taken in relation to historical motor finance commission payments (beyond the £295m charge taken in 3Q24).

• The end-1Q25 CET1 capital ratio of 14.7% was broadly stable q/q (end-FY24: 14.8%). If we assume that Santander UK were operating with an estimated ‘normalised’ average CET1 capital ratio of 13.0% in 1Q (min. requirement excl. P2B is 11.2%), then that would imply a RoTE of c.14%, which is a respectable level of return - though below the group 1Q RoTE of 15.8% and the guided FY25 group RoTE of 16.5%.

• Lending balances were broadly flat q/q at £198bn reflecting redemption activity (mortgages £167bn, which were also flat q/q) but 1Q mortgage lending of £5.8bn was up significantly on £3.1bn in 1Q24. Guidance is for a gradual return to net lending growth in FY25.

• Deposits broadly flat q/q at £183bn.

• NII +6% y/y, driven by lower deposits costs and supported by the structural hedge (structural hedge notional -£4bn q/q to £106bn; WAL 2.5 years). Notably, Banking NIM of 230bps was +23bps y/y and +5bps q/q.

• 1Q credit impairment charge of £33m equates to a 5bps CoR - very contained still despite the fact that economic scenarios were revised at end-1Q and the revision to the downside scenarios took into account the potential impact of weaker investment and the increasing risk from geopolitical events. That said, SAN UK is guiding that CoR will continue to trend up towards pre-pandemic levels.

• Asset quality “remains good” and arrears remain low.

Take-Aways from the Banco Santander earnings call:

• Extracted CEO comments on rationale behind spin-off of UK motor finance business: “…what we're doing in the motor finance business is exactly what we're doing in the rest of the world. I mean we are actually doing that in every single one of our units due to the fact that it's very important to have them separate from the rest and fund it in a different way. That's why we call it the consumer bank…”.

• Extracted CFO comments on UK performance: “U.K., the mortgage market. Well, in terms of volumes, year-on-year, we've seen volumes up 3% and actually a substantial increase in net interest margin in the U.K. The yield on loans in our case, is mostly mortgages, as you know, it was 3.83% in the first quarter of last year and is 4.19% in the first quarter of this year. So a substantial improvement in pricing and also better outlook for volumes. So we are quite constructive on the outlook for activity in the U.K. On the liability side, at the same time, yield on deposits is down from 2.23% last year to 1.99% this year, and that is what explains the very good evolution of net interest margin in the U.K.”.

• Extracted CFO comments on ringfencing: “we are convinced not only in the U.K. but in Europe that banks can contribute a lot more to improving competitiveness in Europe and in the U.K. and contributing to growth. And we think that having a simpler framework to operate will help but that applies to the U.K. and that applies to Europe as well. In terms of what impact this could have on us is negligible. So this is not a question of an impact in the near term. It's just that a simpler operating framework in Europe and in the U.K. should help banks contribute more to improving productivity and growth in the U.K. and in Europe.”.

OSB 1Q25 trading statement - 30th Apr

Notable Take-Aways:

• 1Q performance in line with expectations; on track to meet FY25 guidance.

• Originations £1.1bn in 1Q (1Q24: £1.0bn).

• Net loans £25.2bn (+£0.1bn q/q) with OSB noting that it focused on higher-yielding specialist sub-segments of Commercial, Asset Finance, Bridging and Development Finance. Growth was observed in more complex BTL and our high-yielding specialist sub-segments - which is a positive development from a NIM perspective.

• Retail deposits broadly flat q/q at £23.8bn; c.£0.6bn of TFSME repayments in the quarter taking the outstanding balance to £810m at end-1Q (with a further £150m of repayments effected since 1Q).

• 3M+ arrears unchanged q/q at 1.7%.

• All in all this is a reassuring update. Evidenced delivery of growth in the specialist lending segments outside of BTL will be necessary to see an end to the debate as to whether the strategy should be one of recycling excess capital into growth initiatives or returning excess capital to shareholders via buybacks given the share price. InterBay will particularly need to deliver in this respect.

UK / Asian Banks Results Review

Covering HSBC (HSBA), Standard Chartered (STAN); note that the UK Domestic Listed Banks (BARC, LLOY, NWG, MTRO, CBG, OSB, PAG) and the Irish Banks (AIBG, BIRG, PTSB) are my primary focus from an ongoing results evaluation standpoint so just a few key take-aways below

HSBA 1Q25 results - 29th Apr

Notable Take-Aways:

• Strong momentum in the business; 1Q25 u/l RoTE of 18.4%.

• Remain focused on strategy execution and on track to deliver the cost actions articulated at the stage of the FY24 results - progressing at pace on the simplification-related cost saves and the strategic cost reallocations (full update on this at 1H25).

• Remain confident in ability to deliver on targets (mid-teens RoTE for FY25/26/27) despite the unfavourable changes and increased uncertainty in the external environment.

• 1Q ECL charge includes fresh $150m provision to reflect heightened economic uncertainty.

• Various modelled scenarios to assess the potential impact of tariffs (slowdown in global trade and global GDP growth). In a ‘plausible downside tariff scenario’ management estimates a low single-digit percentage impact on group revenues and incremental ECLs of $500m (incremental to the $150m economic uncertainty provision booked in 1Q). However, no material detail is provided on the scenario particulars.

• CET1 capital ratio at end-1Q 14.7% (above 14.0-14.5% target range but prior to accounting for 1Q25 buyback). Fresh share buyback of up to $3bn announced (estimated CET1 capital ratio impact up to c.40bps) alongside a 10c per share interim dividend (CET1 capital ratio c.50bps, taken in 1Q).

• CEO Georges Elhedery comments on the call on UK ringfencing: “our view on ringfencing is that there’s been major enhancement to the prudential regulations for banks in the UK – in particular, the broader regimes of capital, of loss absorbency through MREL, of liquidity, recovery and resolution, etc. All these measures have, basically, put the bank in a much better, safer prudential space that have made ringfencing, effectively, redundant. The second thing to say is that the UK is the only major economy that has applied ringfencing, so it’s quite unique to the UK. So as an outcome, it’s increased the cost to operate as a bank. It created capital inefficiencies. It trapped liquidity. It, effectively, exposed our customers, including businesses and SMEs, to higher costs. It did somewhat also stifle competition. The bar to be able to compete in the UK for banks has become stiffer and more difficult. So therefore, we believe that removing ringfencing, or at least scaling back on some of the ringfencing considerations, will improve the outcome for customers and, ultimately, therefore, will support growth in the UK. Now, just to reiterate, we are very supportive of the government’s growth agenda, and we will play our role in the UK for that. And as regards the financial impact of the removal or the scaling down of ringfencing, we haven’t done a full analysis, but we believe this will be positive for both capital, cost and our ability to compete and support the growth of the UK economy and our customers.”.

Other Recent Company News of note:

• HSBA announced on 6th May here that its share buyback programme for up to a maximum consideration of $3bn will commence on Wednesday 7th May.

• Reuters reported on Monday 5th May here that Erin Leonard, Global Head of Sustainability at HSBC Asset Management, is leaving the firm. This follows the recent departure of the group’s former Chief Sustainability Officer Celine Herweijer.

• HSBA AGM Statement of 2nd May can be located here. All resolutions with the exception of the shareholder-requisitioned resolution 20 passed (full results here).

• HSBA issued a RNS on 1st May here providing an update on the Group Chairman succession process in the wake of current Chairman Mark Tucker’s decision to advise the Board of his intention to retire as Group Chairman before the end of 2025.

STAN 1Q25 results - 2nd May

Notable Take-Aways:

• Strong 1Q25 performance with underlying RoTE of 16.4%.

• Guidance reaffirmed - continue to guide RoTE approaching 13% in FY26 and to progress thereafter.

• CEO Bill Winters noted that STAN is a far different bank to the one he joined in 2015 - much more capital-generative and delivering much higher returns.

• Emphasised the diversification, resilience, and agility of the network in this uncertain environment - flagged the potential opportunity capture from: i) deepening of the capital markets outside of the US; and ii) tariffs in the medium-term (as companies invest in ASEAN and other countries to diversify their supply base).

• Unclear as to whether the main upfront impact from tariffs will be volume-related or related to credit quality. STAN’s exposure is low.

• STAN asset quality remains strong and has improved over time. No economic uncertainty provision top-ups taken in 1Q like some other banks did.

Other Recent Company News of note:

• STAN announced on 6th May that Darrell Ryman (Interim Group COO) disposed of 13,624 shares in STAN at a price of £10.653 per share earlier on that same day - netting him gross proceeds of just under £150k.

Select UK Unlisted Banks Results Review

Covering Allica, Revolut, Tandem, Zopa

Allica FY24 (y/e 31 Dec 2024) results - 16th Apr

• Profit after tax (PAT) £29.8m, almost doubling from £19.2m the prior year as revenue growth (+£33.6m to £120.4m) outstripped cost growth (+£23.9m to £80.3m) and impairment charges came down by £4.1m (to £10.2m).

• Net loans +54% y/y to £3.05bn. Commercial mortgages comprised 57% of net loans at year-end.

• Deposits +68% y/y to £4.43bn, with balances from business savers now comprising 47% of total balances (up from just 16% at end-FY23).

• Verdict: One to watch as Allica, under the leadership of its CEO Richard Davies, pursues its mission to disrupt the SME finance industry - with Davies noting, in the CEO Review, that “The pace of Allica's growth is testament to the frustration that our customers feel with the status quo, and that Allica is offering a real alternative”. Significant credit gap opportunity for Allica to continue to grow into.

• Reference Material: Press release here and Annual Report here.

Revolut FY24 (y/e 31 Dec 2024) results - 24th Apr

• More than doubled profit after tax (PAT) to £790.4m. Revenues +72% y/y to £3.09bn. Costs +47% y/y to £2.00bn.

• Net loans +86% y/y to £979m. Revolut plans to enter the Irish mortgage market in 2025 - it had been scheduled for 2Q but has now been pushed back a bit. While there is some local scepticism in relation to the ability to apply a digital-only product to the market there is likely some validity to Revolut Europe CEO Joe Heneghan’s recent remarks to The Irish Times to the effect that the mortgage process “can be made a lot slicker”. However, offering the mortgages through the app and initially targeting refinancing customers will mean that growth is unlikely to be explosive.

• Deposits +48% y/y to £22.3bn. Annual Report notes that there was a 59% increase y/y in customers using Revolut as their primary bank (though I couldn’t find what that translates into in terms of customer numbers or deposit balances). Notably, deposits in Ireland are just shy of €1bn (according to recent press reports around the time of the FY24 results) but that’s off 3 million customer accounts.

• 15 million new customers added in the year bringing the total to 52.9 million at end-FY24.

• Verdict: Needless to say it is on everyone’s radar. Not just about traditional maturity transformation activities by any stretch. But, in banking, building trust will be crucial to driving substantive deposit growth via acquisition of primary bank customers. Strides are being made in this respect but there is a long road to travel. One would be naive to discount the disruptive potential of the business in a multi-jurisidictional context in banking in the long-term.

• Reference Material: Press release here and Annual Report here.

Tandem FY24 (y/e 31 Dec 2024) results - 24th Apr

• Delivered a first statutory profit after tax (PAT) of £3.0m in FY24 - up from a loss of £2.9m in the prior year. Revenues broadly flat y/y at £87.5m; operating expenses up marginally (+1.3%) y/y to £64.6m; profit supported by a gain generated on a second charge mortgage portfolio securitisation.

• Outstanding loans £1.2bn, customer deposits £2.9bn.

• Verdict: Distinctive green digital bank strategy and one to watch as the management team focus on driving growth via simplification and delivering, expanding its reach, and developing new products.

• Reference Material: Press release here and Annual Report here.

Zopa FY24 (y/e 31 Dec 2024) results - 24th Apr

• Reported profit before tax (PBT) excl. share-based payments of £34.2m, more than double the FY23 outturn of £16.8m (with FY23 representing Zopa’s first year of profitability). Note that statutory profit after tax (PAT) came in at £21.8m, down from £38.9m in FY23 (though FY23 was propped up by a £23.1m tax credit).

• Net loans £2.86bn, +16% y/y. Deposits £5.5bn, +62% y/y.

• Verdict: One to keep an eye on - an efficient banking business (CIR 37.7%) with scale in mind; 2024 saw beta launch of current account with plans to officially launch that product soon; and the CEO has not been shy over the years at expressing his ambitions for the business to IPO at some point.

• Reference Material: Press release here and Annual Report here.

For completeness it’s also worth noting that BBVA, which owns a significant minority shareholding in the UK’s Atom Bank, published 1Q25 results last week. There was no mention of Atom Bank within the results documentation.

Irish Banks Results Review

Covering AIB Group (AIBG), Bank of Ireland Group (BIRG), PTSB, Avant Money (Bankinter)

AIBG 1Q25 trading update - 1st May

Short Synopsis: Another strong quarter of financial performance. A very upbeat update. All FY25 guidance reaffirmed (including NII guidance despite lower official rate expectations now) and messaging that cons NII for FY26 appears reasonable assuming ECB Deposit Facility rate of 1.75%. FY25 RoTE expected to be materially above medium-term (FY26) 15% target and on track for a materially higher RoTE in FY26 too provided the Irish macro remains in good shape. Interim buybacks potentially on the agenda for 1H25.

In More Detail:

• We don’t get full financial information at the stage of the 1Q results but financial performance was strong and FY25 guidance was fully reaffirmed. Key points:

  • NII of €0.95bn as expected and 1Q NIM of 286bps (versus 4Q24 exit NIM of 3.00%). Guidance for FY25 NII of >€3.6bn reconfirmed despite a 25bps reduction in the management team’s assumption for the year-end ECB Deposit Facility rate to 1.75%. The CFO Donal Galvin noted on the earnings call that FY26 consensus NII is just over €3.6bn and he is comfortable with that assuming an ECB Deposit Facility rate of 1.75%. In my view, these were the most important information points in the update / on the call, serving to underpin confidence in the resilience of the earnings outlook - and likely were expected to be important share price support factors.

  • Net fees and commissions +7% y/y - if this growth rate persisted throughout the rest of FY25 it would imply a FY25 outcome of €713m but it is notable that FY guidance for c.€750m net fees and commissions has been preserved. I was surprised there wasn’t more probing of this on the earnings call.

  • Operating costs (excl. bank levies and regulatory charges, and exceptionals) +3% y/y in line with guidance (management has guided cost growth of c.3% y/y for FY25), predominantly reflecting inflation.

  • Small net impairment charge booked in 1Q; macro scenarios will be revised at 1H25 and management maintained guidance for FY25 CoR in the 25-30bps range. The statement notes that asset quality remains resilient and the CEO Colin Hunt noted on the earnings call that early warning indicators remain very stable - and Galvin flagged that most of the business lending in Ireland is to small and medium-sized corporates, not the large multinationals. NPEs were flat q/q at c.2.8% of gross loans. It’s also worth noting that the stock of PMAs of €353m at end-FY24 constituted 26% of the stock of ECL provisions at that date and coverage levels are high relative to European banks (e.g., Stage 2 cover was 6.6% at end-FY24).

• Gross loans +€0.2bn q/q to €71.4bn; management reiterated guidance for c.5% growth in FY25 - and management seemed keen to emphasise on the earnings call that 1Q loan growth was in fact ahead of plan on a constant currency basis. New lending in 1Q was €3.2bn, up from €2.8bn in 1Q24 - with strong growth in mortgages (+14% y/y) and personal lending (+7% y/y) while new lending to SMEs was relatively stable y/y. One to keep an eye on as the quarters progress despite the positive reassurances at this stage on the +5% y/y growth guidance.

• Deposits flat q/q at €109.9bn - mix between current accounts and interest-bearing balances broadly unchanged and deposit churn has continued to slow.

• Very strong CET1 capital ratio of 16.8% at end-1Q25 reflects strong organic capital generation, the dividend accrual (60% payout assumption, i.e., maximum payout ratio under the dividend policy, required under Article 2 Regulation (EU) No 241/2014), and a 120bps benefit from Basel 3.1 implementation. Board to discuss potentially starting interim buybacks ahead of the 1H25 update - seems logical to conclude this is on the agenda given strong capitalisation. A useful message ahead of the AGM vote later that morning too!

• Management notes that it remains mindful of evolving uncertainty in the external environment and continues to manage the business prudently.

• The statement notes that FY25 RoTE is expected to be meaningfully ahead of the 15% medium-term (FY26) target. Galvin noted on the earnings call that AIBG hopes to meaningfully exceed the medium-term RoTE target again in FY26 - though that clearly does not equate to actual guidance. But, extrapolating current trends, indicates substantive upside to the FY26 target - with recent consensus data reflecting this dynamic. However, macro developments will be influential too.

• Views on the potential directed buyback (DBB) were covered in Financials Unshackled Issue 43 and it will be interesting to keep watching share price developments this week - with the stock up again yesterday to close at 606c. I remarked in Issue 43 that I suspect the Board and AIBG’s UK sponsor will be comfortable approving the DBB provided the share price is in the high 500’s (my own estimate) now that overwhelming shareholder approval has been received. That is clearly an assumption - and shareholders were likely comforted by the fact that the Board has a fiduciary duty to all of its shareholders in its deliberations as to whether or not to transact. However, I reiterate that, based on latest price developments, I expect the DBB to go ahead with the Board and the UK sponsor balancing: i) the positive benefits for shareholders in seeing the State fall off the share register sooner if the DBB proceeds; ii) the sustainable eps accretion impacts of a share buyback; and iii) the contained one-off capital loss for the shareholders who do not participate should the share price rest below 626c at the stage of the DBB.

Other Recent Company News of note:

• AIBG issued a press release on 30th April here noting that it will apply reductions to non-green fixed rate mortgages of up to 75bps with effect from 13th May. Additionally, the press release notes that AIBG is applying a second reduction to 1Y and 2Y fixed term deposit rates - which are reducing by 25bps and 50bps respectively with effect from 13th May.

• AIBG announced, on 30th April, that Elaine MacLean is to be appointed as Senior Independent Director with effect from the conclusion of the AGM on 1st May.

BIRG 1Q25 IMS - 2nd May

Short Synopsis: Another strong quarter of financial performance. All FY25 guidance reaffirmed (including NII guidance despite lower official rate expectations now) and messaging that the outlook conveyed (at the stage of the FY24 update) in relation to prospective FY26 and FY27 NII of slightly >€3.3bn and c.€3.5bn respectively are intact save for a minor downward adjustment to c.€3.25bn for FY26 owing to changed official rate expectations. FY25 adjusted RoTE expected to be c.15% and no change to medium-term targets. Interim buybacks on the agenda again for 1H25 it would seem given capital strength - but some caution likely to prevail given UK motor finance book provisioning will still very much be an estimate at that point (see LLOY comments above).

In More Detail:

• We don’t get full financial information at the stage of the 1Q results but financial performance was strong, profitability was in line with expectations, and FY25 guidance was fully reaffirmed. Key points:

  • NII -8% y/y in line with expectations owing to lower average official rates and deleveraging of portfolios BIRG is exiting - partly offset by lending and deposit volumes and the structural hedge contribution. In relation to the NII outlook conveyed at the stage of the FY24 results - and taking into account changed official rate expectations since then: i) FY25 NII guidance of >€3.25bn reconfirmed; ii) FY26 NII prospect of a little above €3.3bn now down to c.€3.25bn; and iii) FY27 NII prospect of c.€3.5bn unchanged (due to yield curve pick-up). Note that liquid asset recycling benefits (with action taken in this vein in the YTD - with c.€3bn of liquidity reinvested in bonds) and the continuing yield pick-up on the fixed leg of the swaps entered into within the structural hedging programme are key to NII resilience.

  • Business income (incl. share of associates & JVs) +8% y/y - which compares favourably to FY25 guidance of +5% y/y. Confident messaging on this line from the CEO Myles O’Grady on the call - with comfort built through 1Q experience in Wealth & Insurance in particular wherein AUM growth stalled but net inflows of €0.5bn were delivered.

  • Operating costs (excl. bank levies and regulatory charges, and exceptionals) +3% y/y in line with guidance (management has guided cost growth of c.3% y/y for FY25).

  • No information procured in relation to the 1Q credit impairment charge (apart from Spain commenting on the earnings call that the 1Q experience was in line with management’s expectations) but the following points are worth flagging: i) asset quality remains strong; ii) the macro scenarios will be updated at 1H25 as is customary; and iii) the slight q/q pick-up in NPEs to 2.5% (from 2.2% at end-FY24) is not indicative of a change in trend per the CFO. FY25 CoR guidance of low to mid-20bps was reiterated “subject to no material change in economic conditions or outlook”. PMAs of €57m at end-FY24 predominantly related to CRE portfolios and those are expected to be unwound into specific provisions in FY25.

• Net loans broadly flat q/q at €82.4bn (end-FY24: €82.5bn); core loans +€0.3bn q/q (2% annualised growth). Growth came through in Retail Ireland (mortgages most particularly) and Retail UK but there was a contraction in Corporate & Commercial (deleveraging, lower SME and Corporate lending in Ireland).

• Deposits broadly flat q/q at €103.2bn (+€0.1bn q/q); flow to term has slowed relative to FY24 experience as expected.

• Strong CET1 capital ratio of 15.9% at end-1Q25 reflects strong organic capital generation, a dividend accrual, RWA investment, and a 115bps benefit from Basel 3.1 implementation. Well positioned for interim distributions of excess capital to shareholders again at the half-year in my view. However, some caution is likely to prevail given UK motor finance book provisioning will still very much be an estimate at that point (see LLOY comments above).

• The statement notes that the Group continues to remain vigilant to risks associated with trade dislocation.

• FY25 guided adjusted RoTE of c.15% was reaffirmed. No change to medium-term targets.

Other Recent Company News of note:

• The Irish Times reported, on 17th April here, that BIRG has failed in an effort to block a UK High Court case alleging that it issued a £15.7m loan in 2009 on the back of misleading information provided by an employee of the bank.

PTSB 1Q25 trading statement - 30th Apr

Short Synopsis: All key financial metrics “tracking well against plan” and full reaffirmation of FY25 guidance (incl. RoTE of c.5% and a shareholder distribution based on FY25 performance). Asset quality in good shape, CET1 capital ratio strong at 15.3%, and on track to submit IRB model application in 2Q.

In More Detail:

• We don’t get full financial information at the stage of the 1Q results but it was characterised as a strong start to 2025 with all key financial metrics “tracking well against plan” and FY25 guidance was fully reaffirmed. Key points:

  • NII -9% y/y in line with expectations owing to lower average official rates, offsetting higher average interest-earning assets. NIM was -28bps y/y to 231bps. The statement notes that the recent 50bps deposit rate reductions (applied to certain personal and business fixed term and variable deposit products) will help negate the effect of further downward movements in base rates and that NIM guidance of >2.0% for FY25 is therefore preserved. Given the 1Q NIM outturn of 203bps (versus 4Q24 exit NIM of 210bps) that guidance appears to me to present more downside risk than upside risk - but PTSB can also let its loan-to-deposits ratio inch up a bit now again from 87% at end-1Q as it pursues asset growth, which helps here.

  • Net fee and commission income +38% y/y - primarily due to the changes to current account pricing effected in FY24. This growth helped soften the y/y downdrift in total operating income to -5% y/y.

  • Operating costs -4% y/y (-1% y/y on an underlying basis), the voluntary severance scheme is at an advanced stage, and PTSB expects a reduction of 300 in staff numbers (taking into account the redundancy programme, management actions, and natural attrition) in FY25. Other cost reduction actions are progressing too and the statement notes that PTSB is on track to meet its FY25 €525m cost target.

  • Negligible credit impairment charge of €1m in 1Q25. The statement notes that asset quality remains strong and NPEs as a percentage of gross loans were down marginally q/q to 1.7% (from 1.8% at end-FY24). PTSB notes that it will continue to closely monitor the impact of trade tariffs on the Irish economy but is well provisioned and “coming into 2025 had modelled more conservative impairment scenarios than consensus”. Note that the stock of PMAs of €136m at end-FY24 constituted 35% of the stock of ECL provisions at that date and coverage levels are high relative to European banks (e.g., as for AIBG, Stage 2 cover was 6.6% at end-FY24).

• Gross loans up marginally by €0.2bn q/q to €22.0bn - and growth was +2% y/y on a like-for-like basis (adjusting for the Glas III loans sold in July). PTSB is guiding to an acceleration in loan growth through FY25 given 2H is typically a stronger period for drawdowns than 1H. The macro will influence here.

• Deposits +3% q/q to €24.9bn (+€0.8bn q/q). Growth predominantly related to retail term deposits though there was a modest increase in current account and corporate balances too.

• Strong CET1 capital ratio of 15.3% at end-1Q25 which suggests flat organic capital generation (RWA growth offsetting profit contribution presumably) given the expected contribution from Basel 3.1 implementation indicated at the stage of the FY24 results. The statement notes that PTSB is committed to optimising its MREL and capital stack over the coming years give prospective efficiencies now that the bank has returned to investment grade status. I suspect that, in due course, the management target for the CET1 capital ratio of 14% will come down to the 13% level. Importantly, the statement reaffirms that PTSB is on track to submit its IRB model application to the Central Bank of Ireland (CBI) in 2Q. It is important to remember that this application essentially relates to a recalibration of existing IRB models rather than an entirely new model (like in the case of a bank looking to move a loan portfolio from standardised RWA modelling to IRB RWA modelling).

• FY25 guided RoTE of c.5% was implicitly reaffirmed as was the guidance for a distribution based on FY25 performance. No change to medium-term targets.

Other Recent Company News of note:

• PTSB announced, on 8th April, that Hugh O’Donnell has been appointed as an independent NED with immediate effect. O’Donnell spent a large portion of his career in senior finance roles at AIB Group and was most recently Managing Director of Dell Bank International having previously served as its CFO.

Avant Money 1Q25 update - 24th Apr

Updated financial information on Avant Money was published within Bankinter’s 1Q25 earnings documentation - and some more information in relation to plans was conveyed on the 1Q25 earnings call. Here are the key points:

• Avant’s net loans were +23% y/y to €4.0bn, up from €3.8bn at end-FY24 (mortgages €3.0bn, +24% y/y and up from €2.9bn at end-FY24; consumer credit €1.0bn, +15% y/y and in line with €1.0bn at end-FY24). Bankinter also noted that Avant’s share of mortgage originations in the YTD to end-February dipped to 6.1% (7.1% share in the 12 months to end-November). Avant’s NPLs stood at just 0.3% at end-1Q25. All in all, we know that Bankinter is deeply committed to the Irish market but I will repeat my strong view to the effect that it will build its presence slowly and gradually (see below for more detail).

• The 1Q25 slide deck notes, in relation to strategic projects that serve as growth catalysts for the wider Group, that the objective in Ireland is to broaden the strategy, initially with deposit-gathering in FY25. I suspect that business lending could be in the management team’s sights in the not-too-distant future too but it seems like it will be a sensible graduated step-by-step approach to business build.

• The Group CFO Jacobo Diaz confirmed on the Bankinter 1Q25 earnings call that the roll-out of “new deposit capturing capabilities” will start later in 2025 - in the summer - but indicated that we will not see material volume build until FY26 (the Group CEO Gloria Ortez noted later on during the call that one should not expect to see an aggressive deposit-gathering campaign in Ireland in 2025 as “we are going to be testing our capabilities in the market”). Ortez also noted on the call that the initiation of deposit-gathering capabilities in Ireland will procure “promising longer term optionality in terms of creating a universal full service digital bank in Ireland”. Ortez also noted: “With this strategic project, we approved the implementation of a new state-of-the-art flexible platform that could potentially be exported to other countries in the future” (so, the Ireland initiative is something of a blueprint which is interesting in that it may mean some novel initiatives).

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