UK bank sector results preview: best stocks to own now
Ahead of publication of annual results, City writer Graeme Evans looks at what analysts think the top banks will report and which ones they like best.
5th February 2025 14:28
by Graeme Evans from interactive investor
Further upside for banking stocks including Barclays (LSE:BARC) and NatWest Group (LSE:NWG) has been forecast after two leading City firms published their previews of this month’s results season.
The sector’s stock market fortunes improved significantly in 2024, but Shore Capital banking analyst Gary Greenwood believes that valuations are by no means stretched.
His preference is for banks with a more international focus after reiterating his Buy stance on Barclays, HSBC Holdings (LSE:HSBA) and Standard Chartered (LSE:STAN).
- Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts
Lloyds Banking Group (LSE:LLOY) and NatWest have Hold ratings on relative valuation grounds, but Greenwood is also a little nervous that the UK economy could disappoint in the near term.
Overall, he said: “We are happy for investors to ride the positive share price momentum for now but no longer view the sector as being egregiously undervalued.”
His positive stance is matched by UBS counterpart Jason Napier, who recommends UK domestic lenders as a default Overweight and is watchful on international players.
Barclays and NatWest are his top picks, having seen both stocks double in value over the past year. UBS is positioned for another 17% upside to 340p in the case of Barclays and for NatWest to move 20% higher to 510p after upgrading both stocks in this week’s note.
Standard Chartered is the top international pick with a target of 1,255p, while Lloyds and HSBC have Hold positions and targets of 67p and 820p respectively.
- 16 UK stocks least likely to be impacted by Trump tariffs
- The undervalued insurance stocks about to come back into vogue
- 10 hottest ISA shares, funds and trusts: week ended 31 January 2025
Napier said: “We like the UK banks for their valuation discount to the sector and our forecasts for revenue growth delivered in an environment in which we expect the UK economy should strengthen, driven by rate cuts.”
His forecasts over the next three years show UK banks returning up to 31% of current market cap in announced dividends and executed buybacks, led by Barclays.
Overall, Napier expects the industry’s 2025 guidance to confirm attractive net interest income growth, mid-teen average ROTEs (return on tangible equity) and 9-10% total distributed yields.
Meanwhile, the recent firming of interest rate expectations means banks are likely to strike a relatively upbeat tone on the outlook for net interest margins.
The results season will also be scrutinised for any potential upside from the government’s pro-growth policy stance and the latest on motor commission liabilities, including the potential impact on provisioning and buybacks at Lloyds.
The government recently applied to intervene in the court process, arguing that any remediation should be proportionate to the harm incurred by the customer. This boosted hopes that the industry can avoid liabilities previously feared to be as high as £30 billion.
The signs appear positive for Barclays results on 13 February, given that its Wall Street rivals have already reported an encouraging final quarter of 2024. UBS estimates that 60% of Barclays is investment-banking related, with about 60% of that in the US.
- Why the pound’s decline can be a shrewd investor’s gain
- 10 funds to generate a £10,000 income in 2025
- Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
UBS said its estimates put the stock on six times forecast 2026 earnings, which is about 40-50% of the multiple of US investment banking peers and 10-15% below NatWest and Lloyds.
The company’s guidance is for £3 billion in dividends and buybacks in 2024, which is broadly flat year-on-year, and £10 billion over 2024-26. This implies a dividend yield of 2.9% towards the lower end of the sector, making this an area of focus for UBS.
NatWest results follow on 14 February, having benefited from its use of structural hedges to protect against interest rate volatility. UBS thinks hedge-driven net interest income tailwinds are worth 30% of group pre-provision profit in 2025 and 2026 combined.
The bank also boasts an attractive ROTE - driven by a UK-only retail and commercial banking operation - and a well-established practice of returning all free cash flow to shareholders. UBS forecasts an improved 13.2p a share dividend alongside a £1 billion buyback.
With no near-term motor finance liabilities to navigate, the valuation of NatWest has outperformed Lloyds by a considerable margin in the past year.
UBS points out that while Lloyds looks attractively valued on a longer-term basis in absolute terms, it is no cheaper than NatWest.
Napier expects the near-term performance of Lloyds shares will be driven by the size of the buyback in results on 20 February, given that a likely delay in motor finance refunds to at least December 2025 and free cash flow generation may allow for a positive surprise.
He will also be looking to the strength and clarity of any new 2026 guidance shared at the results.
- Shares for the future: why I like this highly rated market leader
- Still time to buy this American tech stock and AI leader
- Stockwatch: has the stock market correctly priced in Trump tariffs?
The bank’s forecasts point to a 2p a share final dividend, up from 1.8p a year ago, and a buyback of £1.5 billion. Underlying profits for the fourth quarter should be £1.5 billion, excluding an assumption for £500 million of motor remediation provisions.
HSBC shares have performed well in recent weeks, with higher US bond yields seen as helpful to the margin outlook ahead of results on 19 February. Press reports have suggested that HSBC under Georges Elhedery will continue to reduce the complexity and breadth of the group.
UBS said clarity on the magnitude of restructuring charges as well as new financial targets for net interest income, costs and payouts are needed to shift the debate on the shares.
Standard Chartered reports results on Friday 21 February, having seen its shares deliver a total return of 54% in 2024.
UBS thinks higher dollar exchange rates and geopolitical volatility are likely to make loan growth a challenge in Hong Kong specifically and in Asia in general.
However, it adds that forecasts for bottom-line growth in the period up to 2026 are entirely at odds with a stock trading at 6.2 times forecast 2026 earnings.
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.