Citi said it stays "constructive on UK domestic banks," noting the sector has delivered some of the strongest net interest income growth in Europe this year even as it expects the first quarter of 2026 to present a more difficult near-term backdrop.
Analysts at Citigroup forecast a quarter-on-quarter decline in net interest income (NII) for the sector in Q1 2026. The brokerage attributes the downtick to a shorter reporting period - a lower day count - combined with ongoing pressure from mortgage margin compression.
Citi's specific Q1 NII expectations include a roughly 2% fall at Barclays and a 1% decline at Lloyds, while NatWest's NII is projected to be broadly flat over the quarter. The bank expects growth to resume from the second quarter of 2026 as the day count effect and margin pressure ease, helped by higher loan and deposit volumes and the scheduled roll-off of structural hedges.
For full-year 2026, Citi's forecasts point to NII increases of 7% at Barclays, 8% at Lloyds and 13% at NatWest.
Turning to UK banks with more international exposure, Citi described trends as "set to be mixed." Lower HIBOR is expected to weigh on NII for those lenders, while non-interest income continues to benefit from robust wealth management growth. Citi flagged that the Middle East region accounts for about 2-3% of loans and deposits at these internationally focused banks and roughly 6-8% of profit before tax; it also expects a modest increase in provisions tied to that exposure.
Ahead of first-quarter results scheduled between April 28 and May 5, Citigroup set out its adjusted profit before tax (PBT) expectations versus consensus. The broker anticipates NatWest's adjusted PBT to land about 7% above consensus, with Barclays and HSBC expected to come in 6% and 3% higher than market forecasts, respectively. Citigroup's estimates are broadly aligned with consensus for Standard Chartered, while for Lloyds its projections sit roughly 3% below consensus, a shortfall it attributes to somewhat lower NII assumptions.
More granular forecasts from Citi include:
- Barclays - first-quarter adjusted PBT of approximately 3 billion, around 6% ahead of consensus, driven by a 1% revenue beat and impairments about 7% lower than expected.
- HSBC - underlying PBT of $10.3 billion, up 19% quarter-on-quarter and 5% year-on-year, on revenue of $18.8 billion; impairments are seen roughly 18% below consensus.
- Lloyds Banking Group - first-quarter adjusted PBT expected at a31.9 billion, about 3% below consensus.
- NatWest - first-quarter adjusted PBT seen around a32.1 billion, about 7% above expectations, supported by provisions that are roughly 16% lower.
- Standard Chartered - forecast profit before tax of $2.2 billion, broadly in line with consensus, with revenue up about 14% quarter-on-quarter.
Citi also outlined several underlying trends within the UK banking market. Mortgage growth is slowing - currently running near 3.5% but expected to ease toward 2% - while corporate lending is expanding at about 8.2% year-on-year and credit card balances are increasing roughly 8.5%. Deposit growth is reported at around 3.5% year-on-year. Asset quality was described as "robust," with delinquencies below long-run averages.
The broker expects mortgage margin pressure to be concentrated in the first quarter. It noted that mortgage spreads had previously sat in a range of roughly 48 to 62 basis points, while deposit spreads continue to compress as interest rates decline.
On recommendations, Citigroup said it remains "most constructive on the medium-term earnings outlook" for NatWest and HSBC, both rated "buy," alongside Lloyds. Barclays and Standard Chartered are rated "neutral."
The next round of quarterly reports will provide a clearer read on how near-term margin pressure and volume dynamics are translating into bank profitability across domestic and international franchises.