The past 12 months have been great for bank shareholders. The Barclays (LSE: BARC), NatWest Group (LSE: NWG), and Lloyds Banking Group (LSE: LLOY) share prices have all surged to multi-year highs.
The Lloyds share price has shot up 54.6% in 12 months and jumped 43.4% over five years:
Barclays shares have rocketed by 81.6% over one year and 106.2% over five:
NatWest stock has beaten both, soaring 101.8% over one year and 148.1% over five:
What’s gone right?
Perhaps these share-price surges aren’t solely due to banks’ management teams and business models? Their improved financial results may be driven by benign economic factors, with all three riding rising tides. In 2024, UK gross domestic product grew by 0.9%, improving on 2023’s 0.4% growth. The unemployment rate also stayed low and currently stands at 4.4%.
Most importantly — and contrary to market expectations — the Bank of England cut its base rate only twice last year. From a 16-year high of 5.25% a year, the Bank cut it to 5% in August and 4.75% in November. This month, it cut again, to 4.5%.
As interest rates stayed higher for longer last year, this boosted banks’ bottom lines. Their net interest margins — the spreads between lending rates and savings rates — beat forecasts. Thus, this added billions to banks’ profits and cash flows.
Trouble ahead?
That said, 2025 may not be such an easy ride for British banks. These five problems could harm their financial outlooks in 2025-26:
1. Rate reductions
The Bank of England is expected to keep reducing its base rate in 2025, further reducing banks’ net interest margins and their profitability. However, strong wage settlements might keep inflation well above the target of 2% a year, preventing aggressive rate-cutting.
2. Loan losses
By and large, individuals and companies paid their debts without problem last year, keeping bad debts and loan losses surprisingly low in 2024. But can this benign trend continue ?
3. Bad behaviour
I’ve sometimes remarked how banks ‘are great at finding landmines with their feet’. Our gaffe-prone banks often lurch from one crisis to another, incurring regulatory wrath, fines, and punishments along the way.
The latest mis-selling scandal involves dealers charging customers hidden commissions when arranging car loans. One estimate is that this swindle might cost £44bn in compensation. Yikes!
4. A housing downturn
In the year to November 2024, the average house price in England and Wales rose by 3% to £306,000. Steady, but not spectacular. Conversely, any pullback in house prices — or a full-blown crash — could harm banks, forcing them to raise lending standards and reduce mortgage volumes.
5. Tech tribulations
Beneath the surface, our modern banking system is built on ancient systems and programs, some dating back to the 1950s. When this creaking financial infrastructure fails, outcomes can be widespread and costly. For example, a massive tech blow-up a month ago froze millions of Barclays customers’ accounts. I expect bigger and more frequent fines for these blunders.
I’ll hold tight
Despite the above concerns, my wife and I will keep the Lloyds and Barclays shares in our family portfolio. After all, both have delivered strong capital gains and juicy dividends, so why sell now? Having said that, these stocks are more expensive than when we bought in 2022, so we won’t buy more at current prices.
