City forecast: Barclays and NatWest to come under scrutiny over cost of borrowing when they launch latest banking reporting season

Two of the UK's biggest banks are poised to face questions this week over how much they are benefiting from the rising cost of borrowing – in what could mark a “definitive break” from more than a decade of loose monetary policy.

Barclays and Royal Bank of Scotland owner NatWest will kick-start the crucial reporting season for the banking sector when they post their latest annual figures, but could face fresh demands for a windfall tax if it emerges that profits have become too inflated in the current high interest rate environment, experts suggested.

John Moore, senior investment manager at RBC Brewin Dolphin, said: “Results from the UK’s major listed banks over the next couple of weeks should confirm a definitive break from 14 years of low interest rates and quantitative easing. However, the return of windfall taxes could be a forthcoming risk."

He also said the banks’ results season “has the potential to have a goldilocks quality to it”, adding: “It will likely be characterised by the benefits of higher rates, the positive impact this should have on net interest margins, and a lower level of provisioning than might be expected in the current challenging economic environment.”

Analysts are forecasting that Barclays will report full-year profits of £7.2bn, a drop from £8.4bn in 2021. Picture: Tolga Akmen/AFP via Getty Images.

Analysts are forecasting that Barclays, which will unveil its results on Wednesday, will reveal pre-tax profits of £1.5 billion for the last three months of the financial year, up from £1.4bn a year earlier. It will take its full-year profits to £7.2bn, a drop from £8.4bn in 2021. A US trading blunder will be partly to blame for the decline, having estimated to have cost the group £1.5bn last year after facing a hefty charge.

Net interest margins – the difference between what a bank charges for loans and pays for savings – will have been a key driving force for profits and losses last year, according to experts at investment platform AJ Bell. Barclays' relevant metric grew to 3 per cent in the third quarter, from mid-2020 lows of around 2.5 per cent, indicating that, like other banks, it had benefited from interest rate rises. The lender is expected to reveal that its credit provisions for the entire year cost £1.2bn.

Squeezed

Russ Mould and Danni Hewson, investment experts at AJ Bell, said: "Banks must now provide a current expected credit loss, so they cannot wait until a loan goes sour – they must make an estimate for a loss if they think it might. That's going to be very interesting at a time when UK consumers' pockets are being squeezed by inflation. Barclays has a £161bn mortgage loan book, a £9bn credit card book in the UK and a £24bn credit card book in the USA.”

Meanwhile, NatWest is expected to on Friday reveal pre-tax profits of £5.6bn, up from £4.3bn in 2021, according to analysts' consensus. It could also see total income jump to more than £13bn for the full year, up from £10.4bn a year earlier.

Mr Moore believes the two banking giants will focus on cost savings and further restructuring of their businesses. “Bolt-on acquisitions of companies that complement their core offerings are also likely to be considerations as drivers for strategic growth. Meanwhile, at Barclays, market volatility and rates movements should offset a fall in [merger and acquisition] deals for its investment banking division to work on.”