Three UK banks to buy with at least 20% upside

Despite doing well in 2024, UK banks still trade at a discount to European peers despite making similar money. This team of analysts reveals the lenders it likes best.

9th January 2025 13:39

by Graeme Evans from interactive investor

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Barclays, NatWest and a “particularly attractive” HSBC have been given Buy ratings after a City firm said UK valuations are still not demanding versus European banks.

Bank of America pointed to some attractive fundamentals as domestic players continue to benefit from their use of structural hedges, which protect against interest rate volatility.

It expects shareholder distributions to remain attractive, led by HSBC Holdings (LSE:HSBA) based on 2025 and 2026 projections for a dividend yield of about 7% a year and $11 billion of annual buybacks.

The bank reckons HSBC shares are currently 20% too cheap based on a price target of 960p, noting the potential catalyst of a strategy update alongside full-year results on 19 February.

This is expected to focus on revenue growth in Wealth Management, as well as provide details on cost restructuring and the outlook for capital allocation and distribution.

It added: “HSBC has an enviable franchise in both Hong Kong and the UK, and is well-placed to capture structural growth opportunities such as Asia Wealth Management.”

Barclays (LSE:BARC) and NatWest Group (LSE:NWG) posted particularly strong share price performances in 2024, with further progress forecast by Bank of America in this week’s note.

It likes the diversified business model of Barclays, predicting that Corporate and Investment Banking operations should benefit from higher activity levels in a falling rate environment.

The bank forecasts a 34% upside for shares to 355p, noting they are still trading at a discount to peers and that a commitment to buybacks should support the valuation.

NatWest is no longer regarded as cheap versus the sector but with the bank still seeing scope for the shares to move 26% higher to 500p.

It likes gearing to the government’s growth agenda as the UK’s largest commercial bank and points out that City forecasts appear conservative on net interest income growth.

Lloyds Banking Group (LSE:LLOY) is given a Neutral recommendation and 60p price target, reflecting significant uncertainty as the largest UK motor finance lender with a 15% market share.

The bank has seen more than £6 billion wiped from its market capitalisation following a Court of Appeal ruling on motor finance commissions.

Today’s note said: “While we think the share price reaction was overdone, and have no concern over Lloyds’ ability to absorb any remediation costs, we see little scope of positive catalyst newsflow on this topic until the Supreme Court ruling, the timing of which is also uncertain.”

Despite some strong share price performance in 2024, UK banks are still only trading on six times 2026 forecast earnings. Bank of America said this was below European banks despite generating similar levels of returns.

One factor in the positive outlook is the support of structural hedging, which helps to absorb headwinds from the interest rate cutting cycle.

Bank of America said: “UK domestic banks have a much higher proportion of hedged deposits, and as they were built up over a longer period - including periods of low rates - the current average yields are much lower.

“As such, the tailwind from unwinding these hedges is much larger.”

The banks have hedged a proportion of their low interest-bearing liabilities, such as current accounts and instant access savings, by investing directly in longer-term fixed-rate assets or by using interest rate swaps.

The greater the hedge going into a rate rise cycle, the more the bank delayed the benefit of higher rates into the future.

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.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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