Shares round-up: UK banks, BP, Rolls-Royce and Novacyt

One City analyst identifies financials as a good source of portfolio income, while BP and Rolls-Royce are among FTSE 100 stocks bouncing back today.

The case for UK banking shares was made by a leading analyst today as NatWest (LSE:NWG) became his seventh buy recommendation in a sector primed for rising interest rates.

UBS's Jason Napier believes the City is being too cautious towards the state-backed lender as he increased his earnings forecasts by 10-15% and target price from 230p to 290p.

NatWest shares today rose 3.5% or 8.1p to 238p, in line with Lloyds Banking Group (LSE:LLOY) after its rival recovered from yesterday's selling to add 1.65p to 50.9p.

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Napier expects 2022 will be a year of “UK bank delivery” based on the potential boost to net interest income from three rate rises, plus benefits of excess capital and reserves.

Barclays (LSE:BARC) remains Napier's top domestic choice with a price of 265p, while HSBC (LSE:HSBA) is his overall top pick based on a potential 18% upside to 590p. Lloyds has a target price of 62p and there are “buy” ratings for Paragon Banking Group (LSE:PAG), Standard Chartered (LSE:STAN) and Virgin Money (LSE:VMUK).

Close Brothers (LSE:CBG) is the only stock in Napier's UK coverage to miss out, with a “neutral” recommendation and price target of 1,485p.

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In relation to NatWest, Napier notes that the lender has the highest level of spare capital and sufficient to continue buybacks in order to reduce the government's 52% stake.

It is also the most geared to interest rate rises based on the company's own guidance for 1% in rate moves to be worth £1.25 billion in net interest income support.

Despite this, Napier believes the City's forecasts for NatWest profits in 2023 are too low by 14%. He added: “Put differently, we think the market estimates imply that the bank writes mortgages at zero spread all through this year: too pessimistic, we think, if the BoE hikes as the curve implies.”

Costs are likely to be 5% ahead of plan, but the better rate environment, fall in excess capital and the bank's exit from Ireland have the potential to improve the return on tangible equity (RoTE) to between 12% and 14% from last year's expected 11.3%.

This is a picture reflected across the sector as Napier believe balance sheets hold far too much capital than needed to fund organic growth. He added: “Banks are not only inflation hedges, they are also good sources of portfolio income.”

Today's improved session for the FTSE 100 index also saw rebounds of more than 3% for BP (LSE:BP.) and Rolls-Royce (LSE:RR.) as investors sensed opportunities after yesterday's heavy selling.

Among the tech stocks recovering yesterday's lost ground, AIM-listed semiconductor wafers firm IQE (LSE:IQE) rallied 7% as new chief executive Americo Lemos revealed trading in line with guidance issued in November.

Supply chain disruption and currency headwinds have previously impacted the stock, sending shares down from 175p in 2017 and 84p last January to Monday's 24p.

Peel Hunt is backing a recovery to 103p and says all the ingredients are in place for the stock to move forwards under the leadership of Lemos.

The broker said: “The tailwinds of 5G infrastructure are still to come, and we also believe there is pent-up demand for mobile volumes. The former is about getting deployment back on track after an elongated trade war, and the latter is about recovery from supply chain issues for the end OEMs such as Apple.

“We are clear on both the strategic positioning of IQE, and the medium-to long-term health of its end markets. These are strong pillars on which to build IQE’s ability to deliver sustainable growth.”

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Another popular AIM-listed stock whose fortunes dived during 2021 is the Covid-19 testing firm Novacyt (LSE:NCYT). The shares were above 1,000p last January, only to finish the year at 369p amid an ongoing contract dispute with the Department of Health and Social Care (DHSC).

Shares today fell another 19% or 46.5p to 192.4p as Novacyt reported 2021 underlying revenues some £4 million below its previous £100 million estimate.

It has seen a noticeable increase in demand for Covid-19 testing in travel, sport, film, media, and workplace settings but still expects virus-related sales to be 50% lower this year.

Novacyt has used some its earlier pandemic windfall to accelerate investment in product development, with some of these new products due onstream in the fourth quarter.

Reporting on his first 100 days as chief executive, David Allmond backed Novacyt to become a leading clinical diagnostics company in the fight against infectious diseases. This includes enhancing its position as a “global first responder” to future virus outbreaks.

“He added: “I am convinced, as I was when I joined Novacyt in October, that the company has the key ingredients in place to build towards the next phase of growth and will continue making a significant contribution to global health while delivering value to our shareholders.”