Proactive Investors - Barclays PLC (LON:BARC) is the top pick in the banking sector, according to Shore Capital, which repeated its ‘buy’ recommendation on stock in the High Street bank ahead of reporting season.
Overall, Shore Capital reckons UK banks are well-positioned to cope with the challenging economic environment in 2023.
Despite rate hikes in the UK and US and the ongoing impact of the pandemic in China, the Liverpool-based investment bank believes that the strength of lenders' balance sheets and the tailwind to income from rising interest rates will help offset cost inflation and higher impairments.
The bank also noted that valuations for the sector remain attractive, with the sector trading on an average price to tangible net asset value (P/TNAV) of 0.7x compared to a projected return on tangible equity (RoTE) of approximately 12% in 2023, based on Shore Capital's forecasts.
Shore Capital said it expected the revenue outlook for mainstream UK banks to remain favourable in 2023, with the tailwind from rising interest rates expected to persist and drive net interest margin expansion.
However, the bank said that this expansion is likely to be at a lower rate than in 2022 due to higher pass-through to depositors, a headwind from UK mortgages refinancing at tighter spreads, and the potential for a turn in the rate cycle later in the year.
While loan books are generally in good shape, having derisked during the pandemic due to advantageous mix shifts and property price inflation, Shore Capital expects asset quality to deteriorate in 2023 as unemployment rises and property prices retrench, leading to higher impairments.
Inflationary pressure is also expected to lead to higher costs for banks in 2023, although Shore Capital said that they are better able to absorb such pressures than some other industries due to wide pre-provision profit margins and the ongoing transition to a digital economy.
Shore said it had issued ‘buy’ recommendations for all mainstream UK banks, with its current order of preference being Barclays first, then Virgin Money UK PLC (LON:VMUK), NatWest Group PLC (LON:NWG), HSBC (LON:HSBA) PLC, Standard Chartered PLC (LON:STAN), and Lloyds Banking Group PLC (LON:LLOY).