By Greg Wright

Published 13th Feb 2023, 07:55 BST

Barclays and NatWest will kickstart the crucial reporting season for the banking sector when they unveil their earnings from the latest financial year. But they could face fresh demands for a windfall tax if it emerges that profits have got too large in the current high interest rate environment, experts suggested.

“The reality is that banks haven’t been making good money in recent years because interest rates have been so low and their margins have been squeezed,” Gary Greenwood, a research analyst at Shore Capital Markets, told the PA news agency.

“When interest rates went up, that was the opportunity for them to re-establish an economic margin.

Two of the UK’s biggest banks are poised to face questions over how much they are benefiting from the rising cost of borrowing.

“But there is a risk that banks may have gone too far and they have become too profitable again, which is when you start getting questions on whether they should be passing more on to customers, or if there should be a windfall tax.

“If banks want to avoid attracting windfall taxes on these ‘excess’ profits, they may need to consider reinvesting them back into the business.”

Mr Greenwood said it could make more “economic sense” for banks to lower interest rates on loans, rather than raise interest rates on savings.

This is because borrowers are more likely to be suffering from rising rates given the squeeze on household finances, on top of inflationary pressures, so doing so would “improve affordability and so the sustainability of lending”.

But he added: “The banks’ balance sheets are pretty sound so chances are we are not going to see bad debts spiral through the ceiling, which we have seen in past crises.”

Analysts think that Barclays, which will unveil its company results on Wednesday, will reveal pre-tax profits of £1.5bn for the last three months of the financial year, up from £1.4bn a year earlier. It will take its full-year profits to £7.2bn, a drop from £8.4bn in 2021.

A US trading blunder will be partly to blame for the decline, having estimated to have cost the group a mammoth £1.5bn last year after facing a hefty charge.

Barclays is expected to reveal that its credit provisions for the entire year cost a hefty £1.2b n.

Meanwhile, NatWest is expected to reveal full-year pre-tax profits of £5.6 billion, up from £4.3 billion in 2021, according to analysts’ consensus.

It could also see total income jump to more than £13 billion for the full year, up from £10.4 billion a year earlier. The lender will share its full-year results on Friday, which will be closely scrutinised by City analysts.

Barclays and NatWest to kickstart reporting season for the banking sector