Key Takeaways
- Britain’s largest banks, including HSBC and NatWest, are expected to raise their profit targets when they report annual earnings in the coming weeks.
- European lenders, such as Santander and BBVA, have already lifted their profit goals, signaling confidence that higher margins will last for years.
- Banks expect to continue benefiting from benign interest rate conditions and loan and fee income growth, but aiming higher is not without risks and can leave investors disappointed if economies stutter.
- UK banks, including Lloyds Banking Group, may also lift their targets, with some analysts predicting ROTE to rise to as much as 18.5% by 2028.
- European banking stocks have outperformed US banks, with the STOXX 600 Europe banks index rising 60% in the past year.
Introduction to Rising Profit Targets
The banking sector is experiencing a significant shift, with major lenders in the UK and Europe set to raise their profit targets. According to sources, Britain’s biggest banks, including HSBC and NatWest, are expected to lift their key profit targets when they report annual earnings in the coming weeks. This move is expected to follow the lead of their European rivals, who have already raised their profit goals, signaling confidence that higher margins will last for years. The decision to raise profit targets is driven by the banks’ expectation of continued loan and fee income growth, as well as benign interest rate conditions.
European Banks’ Profitability
European banks have been performing well, with many lenders already lifting their profit goals. For example, Spanish banks Santander and BBVA have grown their income while keeping costs under control, raising expectations for improved targets. JPMorgan expects BBVA to have delivered an around 20% ROTE in 2025, broadly in line with 2024, with profitability rising to 22% in 2026 and reaching 26% by 2028. Similarly, Santander could target a ROTE by 2028 of around 19–20%, up from 16.1% as of September. Germany’s Deutsche Bank has also set a new ROTE target for 2028 of greater than 13%, up from its 2025 target of 10%. These increased profitability targets demonstrate the confidence of European banks in their ability to maintain higher margins in the coming years.
UK Banks’ Performance
UK banks, including Lloyds Banking Group, may also lift their targets, with some analysts predicting ROTE to rise to as much as 18.5% by 2028. Lloyds and Deutsche Bank are set to report full-year earnings on Thursday, kicking off the European bank reporting season. The UK banks have benefited from earnings resilience lasting longer than initially expected, supported by higher interest rates, robust credit quality, and tighter cost control. According to Peter Rothwell, head of banking at KPMG UK, "UK banks have benefited from earnings resilience lasting longer than initially expected, supported by higher interest rates, robust credit quality and tighter cost control." This positive performance is expected to continue, with UK banks likely to follow their European rivals in raising their profit targets.
Risks and Challenges
While the decision to raise profit targets is a positive sign for the banking sector, it is not without risks. Aiming higher can leave investors disappointed if economies stutter, and the banks may face challenges in maintaining their higher margins. Volatile markets and a flurry of corporate deals may also impact investment bank earnings, buoying the likes of Deutsche, Barclays, and UBS. Additionally, some banks, such as France’s Societe Generale, BNP Paribas, and Credit Agricole, may buck the trend as higher costs and domestic competition weigh on profits. Therefore, while the outlook for the banking sector is positive, there are risks and challenges that need to be considered.
Conclusion and Outlook
In conclusion, the banking sector is experiencing a significant shift, with major lenders in the UK and Europe set to raise their profit targets. The decision to raise profit targets is driven by the banks’ expectation of continued loan and fee income growth, as well as benign interest rate conditions. While there are risks and challenges associated with aiming higher, the overall outlook for the banking sector is positive. European banking stocks have outperformed US banks, with the STOXX 600 Europe banks index rising 60% in the past year. As the European bank reporting season begins, investors will be watching closely to see if the banks can deliver on their increased profitability targets.
