UK State of the Banks – Protecting profitability in a post-boom era

Total profits in the UK banking sector surged post-2020. However, 2024 saw a £3.7 billion decline in pre-tax profits relative to 2023, and most players are expected to face a new profitability paradigm, aimed at protecting from margin compression and cost pressures. Without remedial actions, our central forecast predicts the sector’s return on equity will decline by more than a third from its 2023 peak of 18% to 10% by 2027. As such, cost transformation is no longer optional and AI adoption, workforce productivity, and digital process redesign are front of mind. In a lower-rate, higher-cost world, safeguarding returns will depend on decisive, structural change, not just tactical fixes.

Peter Westlake

Partner, Strategy & Performance Transformation, & Head of Challenger Banks and Building Societies

KPMG in the UK

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Savers Shift, Lenders Follow

Consumers are increasingly moving their deposits from high street and challenger banks to specialist lenders and building societies, attracted by higher returns in a high-rate environment. As a result, high street banks have seen their share of the deposit market drop from 84% in 2019 to 80% in 2024.

Meanwhile, specialist lenders and building societies are gaining ground in lending assets, driven by niche offerings and flexible underwriting criteria.

Neobanks, however, are struggling to convert their large deposit books into loans, with low loan-to-deposit ratios (<30%), potentially putting into question their ability to sustain profitability. The question now isn’t just growth - it’s whether the model can truly deliver sustainable returns.

Securitisation Surge for Capital Optimisation

Securitisation activity has picked up pace, with total securitised loans having shown a 4% compound annual growth rate (CAGR) between 2022 and 2025 to date. Banks are increasingly using Significant Risk Transfer (SRT) securitisations to free up excess capital. This trend is helping to optimise the balance sheet while maintaining liquidity and optimising return on capital. Banks will continue seeking ways to optimise capital usage going forward, especially as the economics of on-balance sheet items may become less attractive as base rates decline.

How banks can protect profitability in a post-boom era

The UK banking sector is diversified, with different business models facing different challenges and opportunities, and leveraging distinct strategies to gain a competitive edge. Going forward, there are various actions that banks can take to protect profitability in a post-boom era:

Build for optimal return on capital, including exploring new distribution models

Regulatory changes such as Basel 3.1 mean banks must take a strategic view of capital allocation - prioritising segments that deliver strong returns and, where relevant, greater societal impact.

Alternative balance sheet strategies like securitisations should also be explored to reduce capital intensity, maintain high returns, and lower exposure to interest rate volatility - an increasingly critical consideration in a persistently uncertain macroeconomic environment.
Review the organisational model and leverage technology to drive structural shifts in cost bases

To stay competitive, banks must embrace technologies like AI, automation, and data analytics to streamline operations, enhance productivity, and reduce costs.

Building societies, for example, need to deploy these tools to sustain their low-yield, high-cost funding model. Challenger banks and smaller mutuals can also benefit from these technologies to manage operational costs and improve efficiency.
Scale operations through (in)organic methods and expand customer reach

Pursue consolidation, mergers, or tap into new market segments to build scale and ensure long-term sustainability. This is essential for smaller building societies and challenger banks, which need to grow to effectively compete against larger institutions and achieve the scale that high-street banks rely on.
Seek growth in selective segments

With moderate growth outlooks, banks must either take market share from incumbents through enhanced customer experience (CX) and trading capabilities or look towards specific growth niches. Segments likely to buck the trend and drive growth include mass affluent, first-time buyers, and, in commercial lending, complex buy-to-let (BTL) and flexible solutions for small and medium-sized enterprises (SMEs). Additionally, M&A should be considered as a potential method to acquire scale and capabilities.

State of the Banks UK is our annual report studying the current and historical performance of 60+ retail and commercial banks in the UK, sourcing from a proprietary data-book of 60,000+ data-points across 8 financial years, to identify thematics and recommend priorities for the sector, going forward.

Please contact a member of the team below for customised insight into a specific bank or building society.

Peter Westlake, Partner – Strategy & Performance Transformation, & Head of Challenger Banks and Building Societies, Peter.Westlake@kpmg.co.uk

Vlad Damian, Director – Banking Strategy & Performance Transformation, Vlad.Damian@kpmg.co.uk

Piergiuseppe Coppola – Manager, Strategy & Performance Transformation, Piergiuseppe.Coppola@kpmg.co.uk

Scott Sheridan – Manager, Strategy & Performance Transformation, Scott.Sheridan@kpmg.co.uk

Additional acknowledgements: