Sector desk · Publishes in week B of the cycle

08

Financials & Banks

Bank earnings, lending growth, credit quality and deposit costs.

Financials & Banks — Meridian62 sector poster

Analysts

Maya MitchkovskiBSc Psychological and Behavioural Science · London School of Economics
Derin SeymenBSc Economics, Finance and Data Science · Imperial College London
Shrey RawalBSc Medical Biosciences with Management · Imperial College London

Equities covered this term

BARC Barclays
HSBA HSBC Holdings
LLOY Lloyds Banking Group
JPM JPMorgan Chase

Weekly notes

2 notes on the record

When this desk publishes
Week of 2 November 2026 Equity HSBC Holdings · HSBA

HSBC profit rise falls short of expectations

By Maya Mitchkovski, Derin Seymen, Shrey Rawal · Financials & Banks desk

What happened

On 27 October, HSBC reported third-quarter (3Q26) profit before tax up 32% to US$9.6bn compared with the third quarter of last year, which included a $1.1bn charge for a lawsuit linked to Bernard Madoff [1][2]. The Financial Times reported that this narrowly missed forecasts, with revenue of $18.6bn also below expectations [2]. Disappointment among investors stems from higher expectations due to increasing interest rates [2]. London-listed shares fell as much as 7% before closing 5.4% lower at 1,291.4p [5], despite higher profit and revenue. Additionally, HSBC repeated rather than raised its 2026 guidance, including banking net interest income (NII) of at least $46bn [1].

What people are missing

Behavioural science suggests why a 32% profit rise can still disappoint. Prospect theory, developed by Kahneman and Tversky, posits that people judge outcomes as gains or losses against a reference point rather than in absolute terms [3]. The reference point here appears to be forecasts. The FT reports that investors had expected a bigger windfall from higher interest rates [2], and chief financial officer Pam Kaur said that in a high-interest-rate environment there is sometimes a market expectation that “we upgrade guidance or we change our targets” [2]. HSBC did not do so. The fall therefore reflects the gap between results and expectations: a 32% rise in profits may be read as a shortfall, and prospect theory maintains that losses weigh more heavily than equal gains [3].

Why it matters

HSBC is one of Europe’s largest banks [2]. The share-price fall coincided with a decline of more than 1% in the Stoxx 600 Banks Index on 27 October, pulling European lenders lower [2]. The results also show how the bank is earning from higher interest rates. It says its NII grew because of deposit growth and the reinvestment of its structural hedge at higher yields, while its net interest margin was stable [1]. The wider reaction suggests investors are treating HSBC’s results as a read on how large banks are turning higher rates into profit.

What we are watching next

We are watching HSBC’s full-year results for whether it meets its reiterated 2026 targets of, for example, banking NII of at least $46bn [1]. Results in line with these targets, with the shares still lagging, would support the presence of high market expectations rather than a change in the bank’s outlook, while a reduction in targets would weaken this interpretation. The Budget announced on 28 October also raised the UK bank surcharge from 3% to 6% for 15 months from January 2027 [6], though most of HSBC’s profit is earned in Asia, so the change reaches only part of the bank [2].

Sources

  1. HSBC Holdings plc — HSBC Holdings plc 3Q 2026 Earnings Release (27 October 2026)
  2. Financial Times — HSBC Shares Fall as Results Disappoint (27 October 2026)
  3. Kahneman, D. and Tversky, A. — Prospect Theory: An Analysis of Decision Under Risk, Econometrica (March 1979)
  4. Reuters — HSBC’s Third-Quarter Profit Jumps 32%, in Line With Estimates (27 October 2026)
  5. Alliance News — Poor Trading Day for FTSE as Markets Await Wednesday’s Budget (27 October 2026)
  6. HM Revenue & Customs — Increase in Rate of Banking Surcharge for a Temporary Period (28 October 2026)

Meridian62 notes explain what is happening and why. They are not investment advice and do not recommend buying or selling anything. Read the disclaimer.

Week of 12 October 2026 Equity Lloyds Banking Group · LLOY

Lloyds' interest-rate protection could face a threat from a Healey bank tax

By Maya Mitchkovski, Derin Seymen, Shrey Rawal · Financials & Banks desk

What happened

On 6 October 2026 the Chancellor, John Healey, met bank bosses [1] in talks that City AM had said would include Lloyds Banking Group (LLOY) [2], after reports that the Treasury was considering a time-limited tax on bank profits for his first Budget on 28 October 2026 [3]. Days after the government’s 30-year borrowing costs hit their highest level since 1998 amid worries about oil prices and inflation [4], he gave no hint of a tax rise, warning that the UK’s finances were “challenging” [1]. The common assumption is that higher interest rates and a government short of money are both bad news for Lloyds.

What people are missing

Our finance and accounting training suggests Lloyds has less to fear from swings in interest rates than from the Budget, because it uses a structural hedge to fix the interest it earns on £246bn of steady money, such as current-account balances, for several years at a time [5]. Without the hedge, that money would earn whatever rates happened to be at the time, but the fixed deals last about 3.75 years on average, so a rate change only reaches the part being renewed while the rest keeps its fixed rate [5]. As old low-rate deals are replaced at today’s higher rates, the hedge’s income has risen gradually, to £3.4bn in the first half of 2026 from £2.6bn a year earlier [5]. Lloyds’ modelling suggests that a 0.25 percentage point rise across all interest rates would add only about £75m in the first year and a cut of the same size would cost about £100m, against more than £14.9bn it expects to earn from interest this year after paying savers and other lenders [5]. A tax would come straight off profit, and banks already pay 28% on most of their profits against 25% for other large companies [6], an extra 3% that cost Lloyds £94m in the first half of 2026 [5], so we read a new tax as the risk that would reach its profits first.

Why it matters

Lloyds describes itself as the UK’s largest financial services provider, with 28 million customers and the number one position in current accounts [5], so any new bank tax would land on the bank many households use for their everyday money. In 1981 Chancellor Geoffrey Howe announced a one-off tax on bank deposits that paid customers no interest, saying high interest rates had driven much of the banks’ profit, especially on current accounts [7]. We read this as a precedent for taxing Lloyds, whose locked-in deals earn on the same kind of money today [5]. Banking analyst John Cronin said, as reported by City AM, that UK lenders would “rightly be furious” if a new tax spared the UK arms of international banks [2], and in that case we read Lloyds as one of the lenders that would carry more of the cost.

What we are watching next

We are watching the Budget on 28 October 2026 [8], although the Telegraph reports that senior ministers are against a new tax on banks [9]. The structure of the tax will matter, because raising the extra 3% charge to 5% or back to 8%, options City AM lists [1], would cut Lloyds’ profits every year it stays, while the time-limited tax the Treasury was reported to be considering (similar to the tax on oil and gas firms after the Ukraine war began) would end after a set period [3]. Either would bear out our reading, while a Budget with no new bank tax would weaken it, since the risk we flag would have passed, leaving Lloyds’ locked-in deals (which it expects to earn more than £7bn this year) to keep supporting its profits [5].

Sources

  1. City AM — Stages of Tax Grief: Is It Time for Bankers to Bargain? (7 October 2026)
  2. City AM — UK Bank Bosses and John Healey Set for Tax Showdown (5 October 2026)
  3. LBC — Chancellor ‘Mulls Windfall Tax on Banks and Oil Companies’ (29 August 2026)
  4. Reuters — UK Banks Tumble as Gilt Yields Hit Highest Since 1998, Budget Jitters Mount (1 October 2026)
  5. Lloyds Banking Group — 2026 Half Year Results (30 July 2026)
  6. HM Revenue & Customs — Amendments to the Surcharge on Banking Companies (27 October 2021)
  7. Hansard, House of Commons — Budget Statement, “Banks” (10 March 1981)
  8. HM Treasury — Chancellor Letter to the Treasury Select Committee (31 July 2026)
  9. The Telegraph — Cabinet Ministers Warn Healey Against Bank Tax (3 October 2026)

Meridian62 notes explain what is happening and why. They are not investment advice and do not recommend buying or selling anything. Read the disclaimer.

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