The UK’s major banking shares have not participated in the wider stock market recovery, despite reassuring updates from US peers. Here’s what the City thinks will happen in the weeks ahead.
Efforts by UK banks to rebuild investor confidence get under way next week when Standard Chartered (LSE:STAN), Barclays (LSE:BARC) and NatWest Group (LSE:NWG) post results from a turbulent first quarter.
By the time Lloyds Banking Group (LSE:LLOY) ends the reporting season on 3 May, the sector will have had ample chance to show that the hammering for valuations since the demise of Credit Suisse (SIX:CSGN) and Silicon Valley Bank has been too harsh given continued favourable operating trends.
UK banks now trade on a forward multiple of about six times 2024 earnings, weaker than their European counterparts on 6.5 times and with some significant variations. Barclays, for example, is on 4 times and Standard Chartered at 4.6 times, rising to around 6.5x for HSBC Holdings (LSE:HSBA) and Lloyds, with NatWest in the middle of the pack at 5.4 times.
Whereas sentiment in the wider stock market has quickly recovered, the UK’s major banking shares remain significantly lower, even after some resilient and reassuring updates from US counterparts in recent days.
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This reflects a market now primed to expect weaker loan growth and softer credit quality, as well as other headwinds such as mounting competition for deposits and higher wholesale funding costs given the sensitivities around tightening liquidity.
UBS analyst Jason Napier has “buy” recommendations on all the major UK banks, believing the market fails to appreciate the continued momentum in net interest income and the fact that capital and liquidity positions are both built to excess.
He said last week: “We think UK banks are attractively valued but expect confidence to build gradually rather than in one worry-busting reporting season.”
Napier’s near-term top pick is Lloyds Banking Group, which reflects a strong track record in excess capital generation and returns. UBS, which has a price target of 60p, sees the lender reporting underlying profits of £2 billion with a capital buffer of 14%.
Barclays offers the most upside based on a target of 244p, with UBS looking for another £1.5 billion in buybacks to be announced this year worth 6% of current market cap.
NatWest is seen as having the potential to reach 350p, with its results next week forecast to show an adjusted profit of £1.5 billion and capital buffer of 14.4%.
Guidance in the sector’s full-year results season largely disappointed the City in February after pointing to peak margins in the first half of this year, earlier than elsewhere in Europe.
This was partly the result of mortgages that were written during the peak of the Covid-19 lockdown and which are now coming up for refinancing at lower spreads.
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However, with average policy rates still rising strongly in the first quarter, Napier believes this guidance may now look too cautious.
He added: “We expect no deterioration in credit quality and think loan losses are lower risk than feared. We expect a quarter-on-quarter contraction in domestic deposit volumes but we don't see this as an impediment to delivering on forecast margins and net interest income.”
Napier’s price target on Asia-focused lender Standard Chartered is 870p, which compares with Jefferies at 1,000p after its analysts took another look at the valuation in the wake of a 22% fall from the 52-week high reached on 6 March.
The sell-off took Standard back to the levels which prevailed before speculation linking First Abu Dhabi to a possible takeover. Jefferies said last week: “We think the pullback in the shares offers an opportunity for either scaling existing positions or new money given.”
Jefferies added that the current valuation does not reflect the return potential: “One potential near-term explanation, as investors reassess thoughts on banks given the regional bank failures in the US, is that Standard’s deposit base is more corporate weighted.”
Standard launches the results season on Wednesday before Barclays on Thursday and NatWest on Friday. HSBC is due to present figures on Tuesday 2 May, with Lloyds the last of the major UK banks to report.
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