Interest rate fluctuations and financial performance and stability of banks: evidence from the United Kingdom’s big four (Barclays, HSBC, Lloyds, and NatWest)

Abstract

This study investigates the impact of interest rate fluctuations on the financial performance and health of the UK’s Big Four banks: Barclays, HSBC, Lloyds, and NatWest. The research analyzes data spanning 20 years (2003–2023) to assess how changes in the bank rate influence key financial indicators, including Net Interest Margin (NIM), Return on Equity (ROE), Return on Assets (ROA), Capital to Risk-Weighted Asset Ratio (CRAR), Cost-to-Income Ratio, Total Equity, Loans and Advances, and Asset Growth. Correlation and regression analyses were employed to explore both direct and indirect relationships between interest rate movements and financial metrics. The findings reveal that interest rate changes have a significant positive impact on ROE for all four banks, with the strongest explanatory power observed for Lloyds and Barclays. ROA is also positively influenced by bank rate changes for Barclays, HSBC, and Lloyds. In contrast, the bank rate has minimal impact on NIM across the banks and demonstrates a negative correlation with the cost-to-income ratio for Barclays and NatWest. The study highlights notable differences in strategic approaches, such as HSBC’s heavy reliance on derivatives, which diminishes the sensitivity of its NIM to interest rate changes, and NatWest’s focus on mergers and acquisitions, which enhances its capacity to leverage interest rate variations to improve performance. This research provides valuable insights into the dynamic interplay between monetary policy and banking performance, emphasizing the importance of strategic management in mitigating risks and optimizing profitability. The findings also contribute to the literature by comparing interest rate sensitivity across banks and offering tailored recommendations, such as prioritizing high-quality loan portfolios and leveraging interbank markets for liquidity management during rate adjustments.