The FTSE 100's five largest banks have reported a combined pre-tax profit of £15.6bn for the first quarter, slightly surpassing the consensus estimate of £15.5bn but falling short of the same period in 2024 by £1bn. Despite this, the sector is facing significant headwinds totaling £2.5bn, driven by geopolitical tensions and private credit exposures.
Iran Conflict Impact
The ongoing conflict in Iran has created a volatile environment for banks, leading to higher interest rate expectations but also increasing the risk of loan defaults. The Big Five collectively set aside over £601m to cover potential souring loans directly linked to the conflict, with only Barclays avoiding a specific provision. Barclays, however, revised its 2026 growth forecast down to 1% from 1.1%, reflecting a deteriorating outlook.
Stagflation Concerns
Natwest CEO Paul Thwaite noted that the bank's UK inflation forecasts have risen to 3.5%, up from 3.3% in February, amid expectations of stagflation. He emphasized the resilience of the sector but stressed that the duration of the conflict and energy shock will be critical.
Private Credit Exposure
The collapse of specialist lender MFS has exposed vulnerabilities in the private credit market, resulting in a £228m hit for Barclays and a $400m fraud-related charge for HSBC. HSBC finance chief Pam Kaur described the MFS issue as an "idiosyncratic" blip, noting that the bank's total exposure to private credit is small relative to its balance sheet.
Regulatory Scrutiny
The first quarter also marked the implementation of enhanced reporting requirements by the Bank of England and the Financial Conduct Authority, forcing banks to disclose their exposure to non-bank financial institutions, including private credit funds. The UK private credit market has grown by 56% since 2015 to $185bn, making it the second largest globally after the US.
Overall, while the banks expect higher income from sustained interest rates, the combined £2.5bn headwinds from geopolitical and credit risks pose significant challenges for the remainder of the year.
