Proactive Investors - UK banks have enjoyed the spoils of the inflation war as the Bank of England’s rate hiking cycle kicked interest margins into overdrive.
But analysts at JPMorgan Chase & Co (NYSE:JPM) have delivered a warning that Lloyds Banking Group (LON:LLOY), Barclays PLC (LON:BARC) and NatWest Group PLC (LON:NWG) are likely to face a profit squeeze in the event hard-landing recession.
“With the scenario of further rate hikes well into restrictive territory now on the table, our house view is that probability of a hard landing for the UK economy is higher,” Raul Sinha at JPM stated.
As a result, “we now expect EPS cuts for the UK banks to intensify with risks to capital return and asset quality”.
In response to these headwinds, JPM is cutting its EPS forecasts, which were already below Street consensus, by another 3% and 9% for 2024 and 2025.
These forecasts assume a peak UK interest rate of 5.75%, although some members of the financial markets predict an even higher peak rate of 6%.
JPM notes a potential upside risk to near-term net interest income (NII) due to increased political pressure that may push for banks to pass on the full effect of interest rate changes to their interest-earning customers.
This passthrough is likely to have negative implications for deposit migration and loan books.
“Hence, we continue to take a cautious view on the outlook for NII and the banks on our 12-month view,” said Sinha.
Given the “strong capital position and above-normalised profitability of the UK banks”, there may also be increased political risks to earnings in the form of forbearance, pricing and windfall taxes, “especially into 2024 with the election coming into view”.
In light of this macroeconomic outlook, JPM has cut its Lloyds rating to underweight while maintaining its preference for Barclay, followed by a neutral rating for NatWest.