UK bank stocks: Q3 results preview
The UK banking sector remains good value , according to one City analyst who looks ahead to upcoming quarterly results.
15th October 2024 15:21
by Graeme Evans from interactive investor
NatWest Group (LSE:NWG) and Barclays (LSE:BARC) have retained their top pick status after a City firm reviewed the “attractive” UK banking sector ahead of a pivotal few days.
Lloyds Banking Group (LSE:LLOY) presents third-quarter results on Wednesday 23 October before Barclays does so the following day and NatWest on Friday 25 October.
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The day after HSBC Holdings (LSE:HSBA) delivers results on 29 October the sector should finally get clarity on the tax outlook when Chancellor Rachel Reeves unveils her first Budget.
As well as corporation tax at 25%, the industry currently pays a 3% surcharge on banking profit above £100 million and a levy of 0.10% on certain balance sheet liabilities.
In its research note, UBS’s base case is for leading UK banking stocks to trade sideways through the earnings season and to re-rate by more than 5% if no extra tax is announced in the Budget.
Even if banks have to contribute more to Treasury coffers, UBS believes investors could take the view that this increase in costs will feed into industry spreads over time to leave aggregate returns unchanged.
Shares in Barclays and NatWest are up by more than 50% so far this year, although their momentum has slowed in recent weeks amid the Budget uncertainty.
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UBS believes there’s potential for further upside after lifting its price targets on Barclays by 10p to 270p and NatWest by 7p to 420p. The pair traded at 233.1p and 356.9p earlier today.
It notes that the wider UK banking sector remains good value at 5.9 times forecast 2026 earnings, representing a 13% discount on its own estimate of 6.8 times.
Over the next three years it sees UK banks returning between 15% and 37% of current market cap. Excluding the dividends forecast for 2024-2026 would take the sector to just 5.5 times 2026 earnings, with Barclays on as little as four times.
One factor supporting the investment case has been the use of structural hedges, where banks deferred the benefit of higher rates to periods when this income is expected to be more valuable.
The tailwinds should help to support net interest income growth at a time when the economy will benefit from Bank of England rate cuts as far as 3% by next winter.
A year from now UBS expects banks to have seen some normalisation of their deposit mix, improved credit demand, better growth outlook and be facing an upward sloping yield curve.
It added: “Unless our numbers are very wrong we don't see how UK lenders continue to trade at a 13% implied cost of equity capital (CoE) in those circumstances.”
For the third-quarter results, however, it does not expect too many answers on how well banks are faring in passing the first rate cuts to customers and how customers are reacting via product preferences. “Management commentary will have to do for now,” it added.
Lloyds Banking Group, which continues to be impacted by uncertainty over motor remediation finance costs, has a Neutral recommendation at UBS and an unchanged 61p price target. This also reflects a smaller hedge position than NatWest and continued mortgage spread headwinds.
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Asia-focused HSBC and Standard Chartered (LSE:STAN) have benefited recently from an improvement in sentiment towards mainland China and outlook for market-linked Wealth operations.
Standard Chartered is the bank’s favoured international play based on a Buy recommendation and price target of 950p, which it has increased from 905p. HSBC is unchanged at 658p.
UBS expects HSBC’s third-quarter results will be interesting for potential colour around new chief executive Georges Elhedery's view on whether strategic change is needed
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