City comes out in support of these big bank stocks

Having had time to digest results from the banking sector, analysts have issued new forecasts and aggressive price targets.

Barclays (LSE:BARC) is still Europe’s cheapest bank stock, a leading City analyst declared today as he highlighted a potential 78% upside for the FTSE 100-listed lender.

UBS’s Jason Napier also believes shares in NatWest (LSE:NWG) should be 42% higher after claiming the market’s reaction to Friday’s changes in forward guidance framework went too far.

The backing for Barclays to reach 262p comes with shares broadly unchanged over the past week and down by 24% in the year to date, despite support from higher interest rates.

Wednesday’s third-quarter results showed key metrics moving in the right direction as the group’s diversified income streams offered a strong tailwind.

Revenues were ahead of forecasts at £5.95 billion and net interest margin up from 2.53% to 2.78%, leading to pre-tax profits of £1.97 billion some 7% stronger than expected.

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The capital cushion remains robust at 13.8% and the banking giant’s credit quality metrics appear in good shape alongside high reserves coverage for card loan losses.

UBS left forecasts broadly unchanged following the results, meaning the stock trades at an “attractive” 0.5 times tangible net asset value (TNAV) and 4.1 times 2023 forecast earnings. Napier added: “We see 4.1x 2023 as an unsustainably low valuation”.

On NatWest, Napier’s continued target of 330p compares with as low as 225p on Friday after a negative reception to guidance contained in third quarter results.

Pre-provision profits for ongoing business beat consensus by 7% and NatWest reiterated a 14-16% target for return on equity, placing the stock on 5.9 times earnings and with a 14% total payout yield.

Napier said: “Management still expects loan losses in 2023 to be no worse than the 'normal' range. But the withdrawal of clear guidance was problematic on Friday for a stock which anecdotally appeared the best owned of UK lenders.

“While we like guidance as much as anyone else we think the stock reaction is an opportunity.”

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NatWest is one of a number of “buy” recommendations in Napier’s coverage, including Lloyds Banking Group (LSE:LLOY) based on the potential upside from today’s 42.2p to 70p. On Thursday, Lloyds reported lower-than-expected third quarter profits but a stronger capital buffer of 15%.

Support for NatWest also came today from Deutsche Bank, with its analyst Robert Noble highlighting a price target of 380p after increasing his estimates by 12-13% for 2023/24.

He added: “NatWest offers significant returns which are further enhanced by rates.

“We are not surprised that the strong revenue growth implied by the current rate curve has some offsets in costs, growth and provisions. But we note the benefits far outweigh the costs.”