16 years after the collapse of Northern Rock, the financial troubles of the comparatively small Metro Bank in the UK earlier this month have caused unrest. Bank rescue missions over the weekend, in which creditors have to accept a significant "haircut" and shareholders are drastically diluted, do not exactly boost morale. However, the institution's problems were primarily self-inflicted and not indicative of a broader financial crisis.

If one followed the media coverage, the uncertain overall economic outlook, from which potential credit risks can be derived, takes the forefront. Nevertheless, for major banks that are set to begin quarterly reporting next week, the glass is still half full. While customers are shifting their sight deposits to interest-bearing accounts, and loan demand is decreasing, their hedging activities (Structural Hedge) are bearing fruit. The nominal value of these hedges has increased with the accelerated influx of deposits during the pandemic. Rising swap rates are expected to boost their earnings in the coming quarters. Unlike the Eurozone, there is no debate in the UK about raising minimum reserves.

According to Lloyds Banking Group CEO Charlie Nunn's recent strategy update, the absolute size of the Structural Hedge is expected to modestly decrease over the year without significant change. "And when we look at the returns, we are reinvesting the Structural Hedge at a higher level than we had previously assumed." The bank feels comfortable with the approach and foresees continued growth for the rest of this year and the following year. The institute had already forecasted inflows from the Structural Hedge for 2024 at a level similar to the previous year. Barclays, a competitor of Deutsche Bank, also expects a favorable outcome.

Furthermore, there's the potential for a decrease in margin pressure within the mortgage business. Data from the US investment bank Jefferies reveals that the spread in the third quarter increased by 30 basis points compared to the previous three-month period. This development could signify a turning point, as highlighted by analyst Joseph Dickerson's team in their banking report outlook. In the second quarter, the spread reached "the lowest level in recent history."

Despite this sign of recovery, mortgages that are due for refinancing with spreads of around 50 basis points were previously contracted with spreads of about 200 basis points. Moreover, based on UBS calculations, the deposit base of the banks has shrunk by 1.4% in the current year as corporate and affluent private clients used excess cash to pay off debt and withdrew funds from sight deposits to invest in higher-yielding assets. There are also no concerns regarding credit quality. The British base interest rate of 5.25% is significantly higher than the 4.25% on which the profit goals of Barclays, Lloyds, and Natwest are based for this year.

For investors, the most interesting question may be whether there will be further stock buybacks. Dickerson suggests that Lloyds might unveil a new stock buyback program of £500 million, which could become a catalyst for the share price. However, some consider this scenario unlikely, as this institution usually discloses such matters when releasing their annual financial results.

"Why should Lloyds sit on unproductive capital until the end of February 2024?", asks Dickerson. Upon releasing the annual financial results, the bank could announce another buyback of £2.5 billion. By the mid-year point, excess capital had already amounted to £1.5 billion. It's anticipated that an additional £0.6 billion was accumulated in the past quarter.

Lloyds completed a £2 billion buyback program at the end of August. Barclays, HSBC, Natwest, and Standard Chartered are currently repurchasing their own shares in the market. The UBS team led by Jason Napier believes that all of them have sufficient leeway to expand their programs. Nonetheless, they only expect HSBC to announce another buyback of $2 billion.

Barclays releases its financial results on Tuesday (24th October), followed by Lloyds (25th October), Standard Chartered (26th October), and Natwest (27th October). HSBC will reveal its results on the following Monday (30th October).