Which of Britain’s Big Four banks can you rely on for the healthiest profits?

It was all supposed to be different. When feisty newcomers such as Metro, Revolut and Monzo burst on to the British banking scene, there were high hopes for change. These new kids on the block would upend the traditional order and give the ‘big four’ – Barclays, HSBC, Lloyds and NatWest – a run for their money.

Some 15 years later, however, and the Big Four are still very big – and growing bigger. They hold more than 60 per cent of all bank deposits, enjoy a chunky share of the mortgage market and dominate business lending too. Having closed thousands of branches and slashed staff numbers, they are also making record profits and there could be more growth to come.

Recovery from the dark days of the financial crisis has not been plain sailing, however. In 2007, the big four reported profits of £34 billion. They did not come near that level again until after the pandemic. However, since then their financial results have gone from strength to strength, and they reported collective profits of more than £45 billion in 2024 and are expected to come pretty close to that this year too.

The banks’ shares have reflected this return to form. NatWest tops the league. Its shares have soared from £1.17 to £5.44 in the past five years, an almost five-fold increase. Barclays shares are up from £1 to £3.71, while Lloyds and HSBC have both more than tripled in price, to 83p and £9.38 respectively.

What comes next? After such cracking gains, will the banking sector run out of steam or is there still money to be made from the big four?

Banks can seem highly complex. At heart, however, they make money by pocketing the difference between the interest they offer on deposits and the interest they charge on mortgages and other loans. That differential tends to rise when interest rates are high so recent conditions, while harsh for borrowers, have been welcome for the sector.

The ‘Big Four’ banks hold more than 60 per cent of all bank deposits, enjoy a chunky share of the mortgage market and dominate business lending too

Now the cycle is supposed to be on the turn, albeit more slowly than anyone hoped for or expected. But the big four have other profit-churning levers to pull, including financial instruments that allow them to benefit even after interest rates start to come down.

Then there is cost-cutting. Closing branches is the most visible sign of their efforts here – and the least welcome to customers. But a huge amount of work has been going on behind the scenes too, as these four unwieldy giants try to simplify their operations and keep up with nimble, digital operators, such as Revolut and Monzo.

Acquisitions can also drive growth. Barclays bought Tesco Bank last year and NatWest snapped up Sainsbury’s Bank a few months later.

The lenders have also been trying to expand into more lucrative areas, such as financial advice and wealth management, while striving to steer clear of pitfalls, of which there have been all too many in the past decade and more.

Mis-selling payment protection insurance (PPI) cost billions of pounds but the banks have also come a cropper time and again from lending too enthusiastically to people and businesses who cannot repay their debts when they fall due.

Right now, all four seem determined not to repeat that mistake, as they try to present themselves as cautious, solid and risk averse.

Lloyds

Lloyds is the largest mortgage provider in the UK and is making strides in business banking

Lloyds is moving in the right direction, but obstacles still lie in its path. It is more accident-prone than many, and the PPI scandal alone cost it more than £20 billion in claims. It is now at the forefront of the motor finance mess.

The consequences of this fiasco will not be fully revealed for some time but boss Charlie Nunn has set aside more than £1 billion to cover claims and is confident that, even if he needs to do more, it will not have a material impact on results.

Should he be proved right, Lloyds offers certain attractions.

The largest mortgage provider in the UK, Lloyds is also moving forward in business banking, making an effort with wealthy customers and trying to sell more savings and investment products to all comers, without slipping on banana skins along the way.

Half-year results were encouraging and brokers at ShoreCap expect profits to rise from just under £6 billion last year to nearly £9 billion by 2027.

A dividend of 3.6p is forecast for this year, rising to 4.8p in the next two years.

Lloyds is arguably more exposed than most to the UK’s economic fortunes, which seem pretty limp right now. But Nunn is ambitious and, if he delivers on his targets, the shares, at 83p, could respond.

Ticker: LLOY 

Traded on: Main market

Contact: lloydsbankinggroup.com or 0371 384 2990

NatWest