Britain’s major banks are navigating the “eye of the storm” as they prepare to unveil their latest financial results, facing dual pressures from mounting credit stress in the US and the looming £11 billion car finance compensation scheme.
Investors are poised to scrutinise Barclays‘ third-quarter earnings on Wednesday, followed by Lloyds Banking Group on Thursday and NatWest Group on Friday.
The anticipation comes after shares in British banking giants experienced significant drops on Friday, weighing down the UK’s FTSE 100 index.
Barclays, with its substantial US operations, saw its stock fall by over 6 per cent.
Richard Hunter, head of markets for Interactive Investor, noted that UK banks were in the “eye of the storm following the US regional bank read-across, ahead of their own third-quarter reporting season which begins next week”.
He added that investors were on “high alert” after two US regional banks disclosed issues with bad and fraudulent loans, intensifying concerns across the sector.
This sent shares in the sector falling sharply and triggered a sell-off across global stock markets amid concerns it could signal wider credit weakness.
Meanwhile, Lloyds is coming under pressure from its exposure to the motor finance market in the UK.
Earlier this week, it told investors it was having to set aside an additional £800 million to cover estimated costs related to the UK regulator’s motor finance compensation scheme – bringing its total provision for the issue to £1.95 billion.
The Financial Conduct Authority has set out proposals for a redress scheme after finding that payouts are due on around 14 million unfair car finance deals.
It is calculated that the total bill to the motor finance industry could reach around £11 billion as a result.
Peter Rothwell, head of banking at KPMG UK, said that the “recent turbulence in the motor market means investors will likely ask whether banks’ exposure to this segment requires additional provisioning” considering the plans.
Barclays, which has a smaller share of the market, has made an £80 million provision.
Santander, which reports later in October, previously set aside £295 million for the issue and has not yet moved to update that figure.
“Credit quality remains resilient overall, but close attention will be paid to any pockets that are showing signs of increasing stress,” Mr Rothwell said.
He added that he was expecting the banks to show they can “navigate continued market volatility while sustaining profitability, delivering meaningful progress on their transformation agendas while keeping investors reassured on credit quality and emerging risks”.