The 2022 earnings season is now over for the FTSE 100‘s banks. With lots of numbers to consider, it can sometimes be difficult to work out which one is performing the best. To keep things simple, I’m going to focus on three key measures of financial performance of particular relevance to banks.
1. Net interest margin
The net interest margin (NIM) is the difference between the interest earned on loans and that paid on deposits, expressed as a percentage of interest-earning assets.
With central banks across the world increasing interest rates, it’s not surprising that the NIM for all of the banks is going up. HSBC recorded the biggest percentage rise, but its NIM is the second-lowest. However, Standard Chartered is expecting the largest increase in 2023 — up 24% (34 basis points).
| Bank/NIM | 2021 | 2022 | 2022 vs. 2021 change (%) | 2023 (forecast) |
| Barclays | 2.93% | 3.54% | +20.8 | 3.2% (UK only) |
| Standard Chartered | 1.21% | 1.41% | +16.5 | 1.75% |
| NatWest | 2.27% | 2.74% | +20.7 | 3% |
| HSBC | 1.2% | 1.48% | +23.3 | Not disclosed |
| Lloyds | 2.54% | 2.94% | +15.8 | 3.05% |
2. Return on Capital Employed
Return on Capital Employed (ROCE) measures how efficiently a bank is using its assets in order to generate a profit. Of the five banks, two (Barclays and Lloyds) are expecting ROCE to fall this year.
If NatWest reaches the top end of its forecast (16%), this will be a 30% improvement on 2022. Last year’s ROCE was a 30% increase on 2021.
| Bank/ROCE | 2021 | 2022 | 2022 vs. 2021 change (%) | 2023 (forecast) |
| Barclays | 13.1% | 10.4% | -20.6 | 10% |
| Standard Chartered | 6.8% | 8% | +17.6 | 10% |
| NatWest | 9.4% | 12.3% | +30.9 | 14%-16% |
| HSBC | 8.3% | 9.9% | +19.3 | 12% |
| Lloyds | 13.8% | 13.5% | -2.2 | 13% |
3. Solvency
A bank’s Common Equity Tier 1 (CET1) ratio is a measure of its financial strength.
By comparing its capital to the risk-weighted assets on its balance sheet, it’s intended to gauge how well a bank can withstand a financial shock. As a consequence of the banking crisis, banks are now expected to have a ratio in excess of 6%. But it’s worth noting that prior to crashing in 2008, and subsequently being nationalised, Northern Rock’s was 7.7%.
All of the banks saw their solvency deteriorate in 2022. In percentage terms, Lloyds was the worst performer. Its CET1 ratio fell by nearly 13% (220 basis points). No explanation was provided, although an increasing risk of loans defaults will have contributed.
| Bank/CET1 ratio | 2021 (%) | 2022 (%) | Market cap (£bn) |
| Barclays | 15.1 | 13.9 | 27 |
| Standard Chartered | 14.1 | 14 | 22 |
| NatWest | 18.2 | 14.2 | 27 |
| HSBC | 15.8 | 14.2 | 129 |
| Lloyds | 17.3 | 15.1 | 34 |
And the winner is …
The market’s reaction to the earnings suggests that Barclays is performing the worst. Its share price fell nearly 8% on results day. However, there were some one-off costs incurred of £966m in connection with a US investigation into the over-issuance of securities. In my opinion, the others are likely to do better in 2023.
Standard Chartered derived 69% of its revenue in 2022 from Asia. Africa and the Middle East contributed another 16%. Similarly, HSBC generated 77% of its profit last year from these three territories. Over the next couple of years, these economies are likely to grow faster than those of Europe and the US. Therefore, these two banks will probably outperform those that are more exposed to the UK economy, like NatWest and Lloyds.
If I had to choose, I would pick HSBC over Standard Chartered. Its dividend yield is approximately twice that of its smaller rival. And it’s forecasting a higher ROCE this year. Also, its NIM is growing faster and is likely to be bigger in 2023.
Therefore, in my opinion, the winner from results season is HSBC.
And that’s unfortunate — because I own shares in Lloyds! However, I won’t be buying shares in the FTSE 100’s most valuable bank. At the moment, I only want to hold one banking stock in my portfolio.
