Interactive Investor

UK bank share tips: Lloyds Bank makes this buy list

A week after the high street lenders published quarterly results, City analysts have been tweaking their forecasts and price targets. Graeme Evans names the banks they like best.

1st May 2024 14:51

by Graeme Evans from interactive investor

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Lloyds Bank logo on a mobile phone

The post-results glow for the shares of Lloyds Banking Group (LSE:LLOY), Barclays (LSE:BARC) and NatWest Group (LSE:NWG) is continuing after a City firm reiterated its “Buy” stance on all three lenders.

UBS said the picture that UK banks offer “idiosyncratic revenue growth even as rates fall” was supported by the trio’s first-quarter figures published over the past week.

Its top pick is still Barclays via a price target of 240p, with NatWest and Lloyds seen as having upsides to 340p and 58p respectively.

The bank’s note was published after the latest Bank of England money and credit figures for March provided further encouragement for the sector.

Mortgage approvals for house purchase rose to 61,300 in March, the highest since September 2022’s mini-budget brought turmoil to the property market.

Consumer credit borrowing also increased, while cash deposits in households’ bank accounts rose by £8.5 billion in the biggest monthly increase since autumn 2022.

Capital Economics told clients yesterday: “March’s money and credit figures provide further evidence that the drag from high interest rates is starting to fade, which supports our view that activity rebounded in the first quarter.

“And our forecast for interest rates to be cut in the coming months (perhaps in June) suggests the economic recovery will continue this year.”

Against this backdrop, UBS expects that trends in net interest margin should continue to improve after Barclays and NatWest reported quarter-on-quarter progress last week.

The pace of decline at Lloyds also slowed to three basis points at 2.95%, slightly better than City forecasts and compared with 3.22% for the same quarter last year.

The company’s guidance for 2024 is for a margin greater than 2.90% but UBS expects to see an improvement from the second half onwards. This reflects benefits from structural hedge earnings in the elevated interest rate environment, coupled with reduced compression in mortgage spreads and a stabilising deposit mix.

Broker Peel Hunt added after last week’s results: “The scenario of net interest margin declining in the first half, then stabilising and rising towards the end of the year - despite expectations that UK interest rates have peaked and are set to fall - seems to be playing out.

“Mortgage spreads have widened recently, deposit churn is slowing, whilst the structural hedge contribution grinds relentlessly upwards.”

The broker has a “Hold” recommendation but acknowledges the strong investment attractions including a double-digit capital yield and a mid-single-digit price/earnings multiple.

Peel Hunt reiterated its “Buy” stance and 330p target on NatWest, pointing to a yield of dividends plus buybacks above 10% for all future years including 2024. It views the acceleration of the UK government’s plan to reduce its 29% stake as positive for the rating.

NatWest and Barclays shares have risen more than 30% this year, whereas Lloyds is up 8% after the Financial Conduct Authority announced a review into historical motor finance commission arrangements.

Peel Hunt said last week there looked to be a strong case for a re-rating of Barclays shares, supported by its solid start to the financial year.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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