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Rising interest rates are good news for lenders, but they bring worries too. Third-quarter results on Tuesday from two of Europe’s largest banks offered contrasting cases in point.

HSBC


HSBC -5.18%

and

UBS


UBS 7.18%

both reported improved net interest income, but they diverged on their outlook. Loan-loss provisions show that the Anglo-Chinese lender is preparing for tougher times, limiting its capacity for shareholder returns, and its shares fell nearly 6% in European morning trading. Meanwhile, UBS’s stock price rose almost 6% after it posted better-than-expected profits and nudged up cash returns.

Central bankers are looking to bring down inflation by increasing benchmark interest rates. For most lenders, it is a welcome change from years of ultralow interest rates that depressed their so-called net interest income—roughly the difference between what they earn from loans and what they pay for deposits. HSBC and UBS are exposed to U.S. rates but also to those in Europe and beyond. Both banks reported higher year-over-year NII in the quarter. UBS raised its expectations, while HSBC was optimistic for 2022 but trimmed its guidance for 2023.

But tightening monetary policy is also increasing the threat of a recession and raising the prospect that borrowers might be unable to pay back loans. Both lenders warned of uncertainty ahead, but HSBC sees bigger risks. The bank booked a $1.1 billion provision for bad loans, primarily due to the weak Chinese real-estate market and expectations of a mild recession in the U.K. UBS actually reduced its total loan-loss provisions in the quarter slightly, likely a reflection of its ultrawealthy client base as well as a conservative loan book.

Both behemoths also have many other moving parts. HSBC is treading a careful line between the West and Beijing under breakup pressure from its top shareholder, Chinese insurance company Ping An. It continues to reassess its footprint and announced a new chief financial officer to oversee its continuing overhaul, lining up a potential successor to Chief Executive Officer

Noel Quinn,

though he isn’t leaving imminently.

UBS continued to gather fee-earning assets from the rich, but falling markets hit assets under management and fee income. It also is reconsidering how to expand its U.S. business after changing its mind about buying robo adviser Wealthfront.

Both banks have decent capital buffers, but UBS’s core equity ratio of 14.4% enabled it to nudge up its anticipated buybacks this year to $5.5 billion. HSBC investors will have to wait a while for such largess as its capital ratio of 13.4% is below its target range of 14% to 14.5%.

After years of cheap money, rising interest rates are pinpointing areas of risk in the financial landscape. At this point, a bank focused on China and the U.K. appears to be more exposed than one that serves the global elite. In addition to much else, today’s central bank policy is driving greater divergence in performance.

Write to Rochelle Toplensky at rochelle.toplensky@wsj.com

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