Banks are back as a City analyst strikes an upbeat note.
UBS's Jason Napier said first-quarter results showing profits 44% above consensus and the prospect that bosses will soon have greater control over dividends and buybacks were among positive factors boosting the appeal of UK lenders.
He added it was hard to justify the current price/earnings (PE) discount under which UK domestic banks trade on 8.3x 2022 earnings versus 9.9x for European banks and 10.9x for the UK-listed international banks HSBC (LSE:HSBA) and Standard Chartered (LSE:STAN).
Napier said: “We think the UK domestic bank stocks are likely to re-rate further as clarity around payouts is had in the near future and as the economy continues to accelerate.”
Shares in UK banks are already up 20% this year, led by Virgin Money (LSE:VMUK) at 48% and Lloyds at 32% higher, much better than growth of 17% for HSBC and 8% for Standard Chartered.
Napier sees further upside of 12% for Barclays to 200p and 6% to 51p for Lloyds, as well as a further rise of 13% to 225p for his favoured mid-cap stock, Virgin Money.
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Alongside the stronger-than-expected macro conditions, UBS noted that UK domestic banks now have greater excess capital than the European average and are better provided for against future loan defaults than all geographies other than Ireland.
Napier also expects an update from the Prudential Regulation Authority in July to return control around capital disbursements back to bank boards after introducing curbs in the wake of the Covid-19 pandemic.
He added: “We are more confident that the UK and Swedish banks will be afforded this freedom than we are that the European Central Bank will move in a similar fashion at its first possible occasion.”
Sentiment towards the UK lenders has been rocked by a combination of Brexit uncertainty and ultra-low interest rates, as well as more recent fears over rising defaults in the pandemic.
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But the lack of deterioration in credit quality in first-quarter results has boosted the 2021 outlook, particularly as a number of banks wrote back some of their loan loss reserves.
Lenders outperformed on capital generation with a weighted average CET1 buffer of 15.7%, although some of this will be consumed by previously announced restructuring charges.
The recent results saw Barclays and HSBC provide the biggest beat on revenues, but they also missed the most on costs, while Lloyds was the furthest ahead on a pre-provision profits basis.
Its release of £459 million of bad loan provisions provided a strong indication of an improving economic outlook and led to a pre-tax profit number of £1.9 billion, much bigger than the £1.1 billion forecast and the previous year's £74 million.
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