The publication of full-year results by the big four UK high-street banks is imminent and there will inevitably be a good deal of scrutiny of their margins and provisions for bad loans.

If last week’s update from Virgin Money UK (VMUK) is any guide, net interest margins should be fairly steady although that will depend on how keen the major players have been to expand their loan books.

Virgin itself was fairly conservative, showing a slightly lower balance of mortgage lending as it took what it called a ‘disciplined’ approach and went for quality over quantity.

The ‘challenger lender’ noted that on the whole credit quality was good, and that it had seen an uptick in sentiment among home buyers now it seems interest rates have peaked.

That improvement in consumer sentiment was also picked out by Barratt Developments (BDEV) and Redrow (RDW) in their trading statements, which were slightly overshadowed by the news of the all-share takeover by Barratt of Redrow.

According to the latest Bank of England credit conditions survey, there was a small uptick in mortgage and consumer loan defaults last quarter, and expectations are for these to continue into the current quarter along with rising defaults by small businesses, but in each case we are still talking about historically low levels and provisions are ample.

Also, while lower rates this year may mean less income on loans, UK swap rates have fallen in advance of interest rates so the banks’ cost of funding is lower.

If there is one fly in the ointment it is the review by the FCA (Financial Conduct Authority) of discretionary commission deals in car finance.

According to Jefferies bank analyst Joseph Dickerson, in a worst-case scenario, claims could reach £13 billion with Lloyds (LLOY) alone potentially on the hook for up to £1.8 billion.

NatWest (NWG) is the first to report earnings on 16 February, followed by Barclays (BARC) on 20 February then HSBC (HSBA) and Lloyds on 21 February.

In terms of conviction, Dickerson rates HSBC as his number one pick based on its proven return on tangible equity and dividend yield.

Among the UK domestic players, Barclays is his preferred choice due to its high level of pre-provision profitability, gearing to lower interest rates, capital return – which is around 40% of its market cap when adding together dividends and buybacks – and what he calls the ‘asymmetric payoff potential’ given the shares trade on just 0.4 times tangible book value. Notably Barclays has just agreed a £600 million deal with Tesco (TSCO) to acquire the latter’s retail banking business. 

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