Proactive Investors - Lloyds Banking Group PLC (LON:LLOY) received a further boost today, after warm words from Deutsche Bank (ETR:DBKGn), as Barclays (LON:BARC) made the lender one of its preferred European banking plays, replacing HSBC (LON:HSBA).
UK bank shares prices have lagged interest rate rises but Barclays thinks the UK risk premium should unwind if confidence in the UK economy can improve.
“With provisions set to stay low and earnings strong, we see attractive value for a patient investor,” Barclays said.
“We prefer overweight-rated Lloyds (price target 70p), which in our view is simply too cheap at 5x 2025 estimated EPS (vs European banks c6x)."
The bank thinks a pause in rate hikes is positive for the UK and its banks, particularly if adverse deposit trends, notably mix shift, can moderate from here as it expects, and earnings benefit from a sizable underappreciated hedge tailwind.
Barclays explained UK banks have forgone near-term rate sensitivity by investing around 50% of deposits into swaps as part of their structural hedge, which are currently low yielding ( around 1%) and are being reinvested above 4%.
This is likely to present a sizable multi-year tailwind to net interest income, Barclays estimates, that should help to offset the effects of rising deposit competition and mortgage margin pressure.
It thinks the earnings impact of a lower-than-expected UK Base Rate is likely to be minimal for UK banks and reckons an earlier peak in the UK Base Rate may slow the pace of adverse deposit trends, which have been weighing on near-term net interest margin estimates, notably deposit mix shift from current accounts to more costly term deposits.