The lesson from the round of results from the financial sector this past week is that the owners of Scotland's largest banks remain in robust health as we head towards a cycle of UK interest rate cuts.
This is significant because lower interest rates generally put pressure on banks' profit margins, which rely to a great degree on the difference between what they charge borrowers such as mortgage and credit card holders and the lower rates they pay to savers. It's easier to maintain a healthy gap when the base rate set by the Bank of England is higher.
The Bank's nine-strong Monetary Policy Committee will announce on Thursday whether they have decided to cut the benchmark rate from its current 5.25%, where it has sat since August of last year. Home owners and businesses are hoping for a reduction and while economists remain pretty much evenly divided on whether it will happen this time around, there is no doubt that the direction of travel in the coming months will be downwards.
READ MORE: Lloyds looks to cut costs and grow income as profit dips to £3.3bn
In anticipation of this, fixed mortgage rates have been falling of late which is one of the reasons why Lloyds, owner of the Bank of Scotland, reported a fall in earnings for the first half of this year despite borrowing costs remaining high.
Lloyds chief executive Charlie Nunn was upbeat on Thursday as he went though the numbers behind a headline 14% decline in pre-tax profits to £3.3 billion during the first six months of this year. Net interest income - the amount it generates from loans minus what it pays out on savings - was down by a tenth on the same period a year earlier.
Lloyds, which also owns Halifax and Scottish Widows, is the UK's largest mortgage lender and was one of several banks that booked record profits in 2023. It was widely anticipated that Lloyds and others would fall short of that high bar in the current year, and indeed that was the case.
That said, the results were better than some analysts had anticipated. Mr Nunn described the performance as "robust", adding that the group remains on track to meet its "targeted outcomes" in 2024.
It was a similar story on Friday morning as NatWest, owner of the Royal Bank of Scotland, smashed City expectations for the first half and raised its profit guidance for the full year.
Profits and income were down but were better than anticipated as the group rode a tailwind of increased customer activity amid an improving economic outlook. Moreover, NatWest expects conditions to improve further in the second half.
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This gave it the confidence to raise its income guidance to £14bn for the full year, versus a range of £13bn to £13.5bn previously.
Not put off by the looming prospect of interest rate cuts, NatWest also unveiled the £2.5bn acquisition of prime UK residential mortgages from Metro Bank, adding 10,000 customer accounts to its retail operation. Furthermore, chief executive Paul Thwaite left the door open to further such deals.
Katie Murray, NatWest's chief financial officer, said the group is assuming interest rates will start coming down at some point during the next three months, falling to 4.75% by the end of this year. A further five interest rate cuts are anticipated next year, taking the base rate to 3.5% by the end of 2025.
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