UK bank sector results preview: Lloyds Bank, Barclays, NatWest and HSBC
With high street lenders about to publish quarterly results, City writer Graeme Evans runs through what to expect from them and which ones the analysts like best.
17th April 2024 13:41
by Graeme Evans from interactive investor
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An upturn by UK bank shares has been backed to continue after a City firm’s earnings preview named Barclays (LSE:BARC) “top pick” ahead of Buy-rated Lloyds Banking Group (LSE:LLOY) and NatWest Group (LSE:NWG).
UBS notes that the UK domestic banks still trade at a material discount to their European peers, despite total returns of 31% for NatWest, 23% for Barclays and 11% for Lloyds so far in 2024.
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Steeper yield curves as markets increasingly position for fewer interest rate cuts in 2024 have helped to boost the sector’s appeal. NatWest, for example, assumed five cuts this year and four next year when it presented its annual results in mid-February.
As well as the enhanced income outlook, banks have benefited from signs of a UK economic upturn and partial retracement of the recent outperformance of Growth over Value.
And while lenders are unlikely to use next week’s results to upgrade guidance, UBS thinks recent trends should be supportive of greater confidence on the profit and dividend outlook.
Lloyds kicks off the first-quarter reporting season next Wednesday, followed by Barclays on Thursday 25 April and NatWest on Friday 26 April.
UBS’ liking for the shares of Barclays follows the bank’s strategy update, which included an increase in its projected 2026 return on equity target to more than 12% compared with the City’s consensus forecast closer to 10%.
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The Swiss bank said today: “We can’t think of anything more which could have been done to produce a more investor friendly package.
“A capped balance sheet for the investment bank and dozens of pieces of financial guidance leaves the market with little uncertainty as to what management aims to deliver.”
Barclays ranks alongside Asia-focused Standard Chartered (LSE:STAN) as one of the sector’s most-crowded trades, but UBS sees upside from today’s 180p after lifting its price target by 10p to 240p.
On Lloyds, a disappointing fourth-quarter update and uncertainty over the potential for motor finance remediation costs has failed to prevent the bank from raising its valuation from 53p a share to 58p ahead of next week’s results.
It said the prospect of a £2 billion share buyback and the lender’s 175 basis points capital generation target for 2024 points to confidence that overall risks are manageable.
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The “Buy” stance on NatWest improves from 265p to 315p. UBS said: “We like NatWest for growing net interest income, improving operating leverage in 2025-26 and a lack of historic dealer distributed motor finance issues, available at a valuation we continue to see as attractive.”
Even after the recent rally, the UK domestic banks trade on 6.4 times 2025 forecast earnings. UBS said that still looked inexpensive compared with their longer run 9.4 times average forward earnings multiple or the European equity market on 13 times.
The bank has a “Neutral” recommendation and 630p price target on HSBC Holdings (LSE:HSBA), believing the key issues for the stock are the revenue outlook - especially in 2025 - as rates fall and the general lack of confidence around income forecasts and sentiment concerning China.
But with the US rate curve now including two rate cuts rather than the six at the start of the year, there's room for an improved outlook to be shared in first-quarter results on 30 April.
UBS believes this could be powerful given the forthcoming 21 US cents special dividend for payment in the second quarter and with HSBC among the least-crowded trades in UBS’s European coverage.
Standard Chartered, which reports on 2 May, is UBS’ favoured international pick with a “Buy” recommendation and 810p price target.
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