UK banks adopt active balance sheets amidst volatility
In the quiet between rate speculation, shifting growth narratives, and geopolitical tremors, a fundamental reshaping of UK banking is underway. The sector, once anchored by the steady rhythm of Net Interest Income (NII) and predictable regulatory cycles, now confronts a landscape where traditional playbooks are rediscovering their relevance.
For C-suite bankers, the mandate is unambiguous: active balance sheet management is no longer a tactical exercise but a strategic imperative—one that will define resilience, competitiveness, and shareholder value, in this new norm.
The Silent Reckoning in UK Banking
Consider the UK, where banks have long relied on the predictability of NII, today, that engine sputters. Loan growth challenged, liquidity surpluses ballooned, and investor scepticism deepened. Capital markets deliver a stark verdict: while US peers like JPMorgan and Goldman Sachs command premium valuations, many UK and European lenders trade at discounts of up to 75% on price-to-tangible-book metrics.
This disparity is evident in our own analysis, as shown below. Tier 1 US banks, are thriving in the current environment, buoyed by a favourable capital market structure, a deep investor pool, and—crucially—superior balance sheet velocity, diversity, and efficiency. Their UK and European counterparts, are however, shackled by structural inefficiencies, over reliance on NII, and unresolved questions about their ability to sustain returns.
GSIBs: Global Systemically Important Bank. Source: Financial Stability Board, 2023
Source: Refinitiv & Visible Alpha analyst 2-year horizon forecast | Economic Spread = RoTE - Cost of Equity (CAPM basis)
Regulatory compliance undoubtedly remains foundational, but differentiation now hinges on agility. Proactive balance sheet management is a bridge to closing this transatlantic gap.
Geopolitical Volatility Demands Top-Down Balance Sheet Agility
Geopolitical shocks—trade wars, sanctions, supply chain fractures—have evolved from rare crises to recurring threats, requiring top-down balance sheet agility as a boardroom priority. These systemic shocks redraw economic landscapes overnight, increasing the vulnerability of banks due to their diverse sectoral involvements and extensive international operations.
Leading institutions, particularly in the GSIBs circle, are acting decisively. Confronting escalating tensions, several large US and UK banks, have institutionalised group-level “rapid balance sheet management” frameworks, with reporting lines directly to key risk committees, executive management, or even the board itself.
When acute shocks occur, senior executives convene in cross-functional "war rooms," rapidly assessing potential domino effects, aligning on plausible scenarios, and defining high-level assumptions. These assumptions directly inform fit-for-purpose, top-down balance sheet modelling suites, generating actionable insights that empower decisive and timely management responses.
This executive-led process quantifies prudential and economic impacts within days—a marked improvement on the quarterly planning cycles common among UK peers. For institutions that adopt it, this capability delivers a critical competitive edge.
Source: Bank of England, Bloomberg, Deloitte Analysis
The traditional reliance on swap rates as a gauge of future interest rate expectations is being challenged. Since the onset of the COVID-19 pandemic, a persistent divergence has emerged between swap rate movements and actual central bank policy rate changes. This discrepancy, showing no signs of abating, highlights the heightened uncertainty and increasingly diverse range of market expectations within the system.
For bankers, balance sheet management has long been a board room mantra—a box to tick amid quarterly cycles. That time is over.
Geopolitical shocks are not the sole catalyst for top-down, rapid balance sheet management. These capabilities are critical for executive decision-making, especially amidst structural shifts that could redefine a bank’s trajectory. This includes navigating hostile takeovers, strategic portfolio divestitures, or abrupt regional growth pivots. From the C-suite’s lens, such agility ensures swift alignment of capital, liquidity, and risk appetites with evolving strategic priorities. For shareholders, it translates to proactive value creation: mitigating downside risks whilst capitalising on emergent opportunities.
The Chess Game of Interest Rates
Even as the Bank of England signals potential rate cuts in 2025, the path forward remains fraught with complexity. Swap curves—the traditional compass for balance sheet pricing— are oscillating wildly, reflecting the volatile market sentiment. This volatility is poised to intensify as inflationary pressures, exacerbated by US tariff policies, take hold. In this climate, structural hedging—contributing up to 40% of net interest income (NII) for UK’s Tier-1 banks—has become both a shield and a vulnerability.
While institutions such as NatWest and Barclays, having locked in hedge yields above 1.7%, currently enjoy a near-term margin cushion, the looming maturity of existing structural hedge tranches adds a layer of complexity. With an average duration of 2–3 years and a prevalent reliance on mechanical hedging approaches, UK banks, including building societies, face mounting pressure as hedges roll off and require replacement at potentially lower yields.
This reality has sparked a critical debate: should institutions adopt more agile, dynamic hedging strategies anchored by rigorous governance? Notably, select UK peers have already responded by extending hedge durations in a disciplined manner—a tactical shift that underscores the urgency of recalibrating traditional approaches.
Source: Deloitte research based on publicly available Pillar 3 reports and Q4’2024 financial results. Structure Hedging income presents a Group-level perspective; the author did not make assumptions about the attribution of specific legal entities or to business lines.
[1] HSBC's hedging strategy encompasses multiple currencies, potentially allowing them to access and generate higher yields compared to their UK counterparts who have a more limited geographical reach.
To master the delicate dance of rates and hedging, institutions should focus on two key actions:
Navigating the Uncertain Timing of Regulation
Adding further complexity to this evolving landscape is the impending implementation of Basel 3.1, now set to take effect in January 2027 following a one-year delay announced by the Prudential Regulation Authority (PRA). While this delay provides some breathing room, it is not a reprieve from action.
For banking leaders, proactive adaptation remains critical to safeguarding shareholder value amid evolving regulatory demands. Two strategic priorities stand out:
The Six Pillars of Future-Proof Balance Sheets
The “new norm” is no passing storm—it is the climate. Banks clinging to quarterly tactical balance sheet exercises will falter. To thrive, we propose six interconnected imperatives, forming the pillars of resilience:
Source: Deloitte insights
Yet a pivotal question remains: who should lead this transformation? Centralising authority within Group Finance or Treasury offers control and expertise. Empowering business-line CEOs, however, fosters market responsiveness and ties outcomes to executive remuneration. The optimal model hinges on a bank’s unique risk culture, business profile, and accountability framework—there is no one-size-fits-all answer.
As rate-cut trajectories grow murkier and geopolitical fault lines deepen, for CEOs, CFOs, and CROs, the imperative is clear—strategic foresight and organisational agility will separate future leaders from laggards.
The question is not if to act, but how swiftly.
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The author wishes to thank Phillip Olivier, Rahmon Ojukotola, Adam Clark, Angelina Romanova, Becca Aitken and Yuanmin Zhu for their contributions to this article.
