1Q26 Bank Earnings Remain Resilient, but Re-Rating May Be Delayed
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1Q26 Bank Earnings Remain Resilient, but Re-Rating May Be Delayed
Morgan Stanley expects that UK and Asian bank earnings in 1Q26 remain broadly constructive, with NII, trading and fee income, and capital returns providing support, while macro and geopolitical risks, a decline in HIBOR, and higher IFRS9 provisions are likely to limit the expansion of valuation multiples.
- For UK banks, 5-year swap rates above 4% support NII, and the report still expects high single-digit 2026E NII growth.
- For Asian banks, the quarter-on-quarter HIBOR decline of about 66 bps is a drag on NII, but non-interest income growth driven by market volatility is expected to offset this pressure.
- Barclays remains one of the European top picks, with management expecting strong growth in investment-banking income and fees, and a likely announcement of a £500mn buyback.
- Lloyds is expected to see quarter-on-quarter 1Q NII growth of around 2%, with NIM up 5 bps to 3.15%, and retains an Overweight rating.
- Standard Chartered’s medium- to long-term RoTE and capital return remain attractive, and valuation is not expensive, while Asian macro, rates, and credit costs are key risks.
Report interpretation
Overview
This report is Morgan Stanley’s 1Q26 earnings preview for UK and Asian banks. The key view is that profitability remains resilient: UK banks benefit from higher rates and NII support, while Asian banks face HIBOR declines but are expected to be offset by non-interest income supported by market volatility. At the same time, Middle East tensions, macro uncertainty, geopolitical risk, and increased provisioning under IFRS9 model overlays could delay valuation multiple re-rating.
Core views
The report maintains an Overweight view on Standard Chartered across both its European and Asian listings and is constructive on Barclays and Lloyds. Barclays is supported by stronger growth in trading and investment-banking fees, Lloyds by NII and NIM momentum, and Standard Chartered by improving RoTE, capital return, and relatively modest valuation. NatWest, while potentially having room for income revisions and likely already near the top of company guidance for the full year, is kept at Equal-weight. HSBC’s capital return, fee growth, and cost control provide defensive support, but macro and geopolitical risks remain.
Analysis framework
The report assesses earnings resilience through 1Q26 revenue, NII, NIM, provisions, costs, capital return, and valuation metrics, and combines rate-path, GDP assumptions, HIBOR moves, market volatility, IFRS9 provisioning, buyback plans, and RoTE forecasts to compare the banks on a relative basis.
Methodology notes
Target prices for HSBC and Standard Chartered are based on probability-weighted valuations across bull, base, and bear cases.
HSBC applies case weights of 30% bull, 65% base, and 5% bear, using a three-stage Gordon Growth Model; Standard Chartered applies 10% bull, 80% base, and 10% bear, with key assumptions including cost of equity, payout ratio, and a 2.5% terminal growth rate.
Bank revenue is split into net interest income and non-interest income, with rate, loan growth, trading activity, and fee income impacts assessed separately.
UK banks focus on deposits, mortgages, swap rates, and loan growth; Asian banks focus on HIBOR decline pressure on NII and market volatility support for trading, wealth, and fee income.
Provisioning in a model-led manner is brought forward or increased amid rising macro risk.
The report builds in Middle East-related risks and GDP erosion assumptions in 1Q, and expects UK and Asian banks to face certain IFRS9 provisioning pressures or management overlays.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- BarclaysTop Pick / Overweight
- Strengths
- Strong growth in trading income and investment-banking fee income, Group 1Q income forecast above consensus, valuation at 0.89x P/2027E TBV, and potential 2028E RoTE of 14-15%.
- Weaknesses
- Exposure to CIB-related MFS provisioning and rising IFRS9 provisioning pressure.
- Comparison
- Relative to other UK banks, Barclays’ investment-banking resilience and fee growth are more pronounced.
- Risks
- Private credit and asset-quality concerns, weaker macro backdrop, and higher-than-expected provisioning.
- Lloyds Banking GroupOverweight
- Strengths
- Stable NII momentum, 1Q NII expected to grow about 2% quarter-on-quarter, NIM up to 3.15%, and costs below consensus.
- Weaknesses
- Loan growth may be affected by front-loaded mortgage demand and potential later demand slowdown.
- Comparison
- Compared with NatWest, Lloyds has clearer appeal in NII and RoTE.
- Risks
- Costs related to motor finance, IFRS9 provisioning, and slower mortgage growth.
- NatWest GroupEqual-weight
- Strengths
- Full-year income outlook near the top of company guidance, with potential for upward revision to conservative guidance; CET1 expected at 14.2%.
- Weaknesses
- 1Q NII expected to be flat quarter-on-quarter, with mortgage roll-offs and seasonality from the COVID period weighing.
- Comparison
- Valuation and RoTE are solid, but there is less clear upside catalyst relative to Barclays and Lloyds.
- Risks
- NII build below expectations, restructuring costs, and higher provisioning.
- HSBCEqual-weight / Overweight by listing
- Strengths
- High mid-teens RoE, capital returns, non-interest income growth in wealth and corporate banking, and cost control support the share price.
- Weaknesses
- Rate-cycle peaking pressures NIM, and a possible US$250mn management overlay in 1Q.
- Comparison
- Compared with Standard Chartered, HSBC has stronger defensiveness, but some listings have a more neutral rating.
- Risks
- Global growth slowdown, China macro risk, geopolitical and tariff tensions, larger-than-expected rate cuts, and cost control below expectations.
- Standard CharteredOverweight
- Strengths
- RoTE expected to exceed 14% from 2027, with approximately US$8.8bn in dividends and buybacks in 2026-27E, relatively attractive valuation, and Asian growth plus non-interest income buffering NIM pressure.
- Weaknesses
- Relatively higher cost-to-income, making profits sensitive to small changes in income and credit costs.
- Comparison
- Compared with HSBC, Standard Chartered is more sensitive to Asian macro and credit quality, but valuation and RoTE improvement offer greater upside optionality.
- Risks
- Deterioration in Asian macro conditions, rising rate pressure, worsening asset quality, failure to hit cost targets, and geopolitical risks lifting cost of capital.
Key data
- UK banks 2026E NII growthhigh single-digit growth5-year swap rates above 4% are viewed as offsetting pressure from slower loan growth.
- 1Q26 provision cost assumption48bp CoR annualizedAligned with a 50bp GDP erosion assumption, reflecting IFRS9 model-led provision uplift.
- Barclays Group 1Q income forecastabout 2% above consensusTrading and fee income remain strong, with an expected CIB-related MFS provision of £200mn and an expected £500mn buyback.
- Lloyds 1Q NIIaround 2% quarter-on-quarter growthNIM is expected to rise 5 bps to 3.15%, 1% above consensus.
- NatWest full-year income forecast£17.6bnAt the top of the company’s £17.2-17.6bn guidance range, with potential for future upside revision.
- Asian bank HIBOR movementaverage month-on-month HIBOR down about 66 bpsThis pressures HSBC and Standard Chartered NII, but non-interest income is expected to offset it.
- HSBC capital returnabout US$6-12bn in buybacks from 2026The report expects 50% payout and capital returns to support the share price.
- Standard Chartered RoTE12.8% in 2026E; above 14% from 2027RoTE expansion and high capital returns are key reasons for the Overweight view.
- Standard Chartered capital returnabout US$8.8bn in dividends and buybacks in 2026-27EHigh distributions support shareholder returns, but earnings are sensitive to changes in income and credit costs.
Impact & implications
The investment implication is that bank shares still have earnings support, but investor patience for valuation rerating may be weakening. UK banks’ NII and capital returns remain defensive, while Barclays and Lloyds appear relatively more attractive; for Asian banks, the key variables are non-interest income, capital-markets activity, resilience of Asian macro conditions, and asset quality. If macro or geopolitical risks rise, provisions and cost of capital could increase, compressing valuation multiples.
Risks
- Middle East tension and geopolitical risk could lift IFRS9 provisioning and credit costs.
- Rate declines or further falls in HIBOR could pressure NII and NIM.
- Loan growth may weaken later if mortgage demand is front-loaded.
- Macro slowdown, especially Asian or China-related macro risk, could worsen asset quality.
- If capital-market activity disappoints, non-interest income may be less able to offset NII pressure.
- Underperformance in cost control would weaken RoTE expansion and valuation support.
- Investment banking, private credit, or related asset-quality issues could lead to additional provisioning.
What to watch
- Actual 1Q26 NII, NIM, and non-interest income performance across each bank.
- Whether IFRS9 provisioning, management overlays, and credit costs come in above expectations.
- Whether Barclays announces a roughly £500mn buyback and whether trading and investment-banking income is delivered.
- Whether Lloyds’ NIM reaches around 3.15% and whether full-year NII is above the £14.9bn guide.
- Whether NatWest raises income or profit guidance during the year.
- Capital return, cost, and growth signals from the May investor days for HSBC and Standard Chartered.
- The impact of HIBOR, short-end rates, Asian macro indicators, and market volatility on NII and non-interest income.
- Whether Standard Chartered delivers RoTE above 14% from 2027.