UK bank sector: City’s favourite shares named

Support for the shares of Barclays (LSE:BARC) and heavily sold HSBC Holdings (LSE:HSBA) has been revealed after City analysts revisited their price targets in the wake of the 2023 results season.

Barclays appears to be the sector’s biggest winner after RBC Capital Markets today lifted its valuation estimate from 230p to 265p after UBS earlier moved from 200p to 230p.

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That compares with this afternoon’s 167p after below-par fourth-quarter results were offset by the outlook for shareholder returns in the three-year plan of boss C.S. Venkatakrishnan.

UBS believes the new strategic targets, particularly much greater capital efficiency, will put Barclays on a level footing with peers in terms of distributed yield.

In the past, a lower return on tangible equity and growth in the investment bank’s risk-weighted assets would have prevented Barclays from matching the payouts of other firms.

UBS said: “That has changed and is key for the re-rating we think the bank deserves. After that, with dozens of targets provided, it's all about execution. We'll soon know if they're on track.”

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The bank’s headline projections include a return on equity target of more than 12% in 2026, which compares with the City consensus before the presentation of 9.7%.

UBS is also more positive on Lloyds Banking Group (LSE:LLOY), despite fourth-quarter figures missing expectations and the lender facing the uncertainty of potential motor finance redress costs.

The City firm said that plans for a £2 billion share buyback and capital generation targets point to confidence that overall risks are manageable.

The bank’s forecasts are unchanged, but UBS has increased its price from 50p to 53p, representing a further upside of 14% on top of a 6% gain since the results.

HSBC shares were the worst-hit in the earnings season after chunky annual profits missed expectations due to write-downs relating to Chinese commercial real estate exposure.

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The shares are down 14% despite more big shareholder distributions after the lender declared its highest full-year dividend since 2008 alongside buy-backs totalling $9 billion.

The recent sale of HSBC’s Canada business, which is expected to complete this quarter, is also due to result in a special dividend distribution of 21 US cents a share.

Bank of America reiterated its “Buy” recommendation following the results, with its target price of 760p representing a 26% uplift on today’s price.

While it admits that a backdrop of rising costs in a slow economic environment has asked a lot of investors, it believes HSBC's markets are turning. It adds that problem loans are falling, especially in Hong Kong and mainland China, to leave impairment guidance looking conservative.