Three of the UK's biggest lenders are due to post first quarter earnings next week and all are expected to report lower profits, so why is it that research out today shows banking executives in Scotland to be resoundingly optimistic?
A survey of senior Scottish bankers by KPMG found almost 90% are confident when it comes to overall business growth in the first three months of this year, supported by a buoyant outlook on expected profitability (84%). And while inflation, interest rates and cost pressures remain a concern, three-quarters reported a positive outlook for the UK economy.
Yet Bank of Scotland owner Lloyds is expected to report a hefty £600 million decline in profits when it posts its results on Wednesday, while Barclays is predicted to follow suit on Thursday with a drop of £400m. NatWest, owner of the Royal Bank of Scotland, is pencilled in for a decline of £600m when it reports on Friday.
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At face value these expectations by City pundits are wildly at odds with the findings from KPMG, but dig a little deeper and it begins to make some sense.
First of all, those concerns about interest rates will have receded somewhat following news earlier this week that while headline inflation has come down, wage inflation has remained higher than the Bank of England would like. This means the Bank is less likely to cut the cost of borrowing as fast or as early as previously expected.
While many consumers and businesses are eagerly anticipating an easing in interest rates, higher base rates support the profit margins of commercial banks by widening the gap between the lower amounts of interest they pay to savers and the higher interest charged to customers.
READ MORE: Interest rate cut hopes pushed back after slower-than-expected inflation fall
Secondly, falling profitability needs to be put into perspective. 2023 was a bumper year for the banking industry as borrowing costs soared, setting a high bar for year-on-year comparisons in 2024.
So although falling short of last year's first quarter figures, Lloyds is still expected to report a profit of £1.7 billion, Barclays £2.2bn, and NatWest £1.2bn. That's plenty of reasons to see a glass half full.
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