Rising interest rates should help the UK's biggest banks, but Shore Capital still sees better value among smaller lenders.
Analyst Gary Greenwood said valuations at the large banks already capture much of the benefit from fatter margins and returns.
Stronger profits could also attract more competition and higher taxes.
Small and mid-cap banks face tougher conditions, particularly in buy-to-let, but their share prices already reflect much of that pressure.
Vanquis Banking Group offers the most upside of the broker's 'buy-rated' names, with its 120p target sitting 63% above Thursday's close.
Shawbrook, Paragon and Close Brothers all carry 'buy' calls with upside of around 50%.
Standard Chartered is rated 'sell' with a 1,765p target, 20% below Thursday's close.
HSBC and Lloyds are also rated 'sell', while Barclays is a 'buy' with a 550p target.
Slow burn for the majors
The big banks benefit because their large current-account bases provide cheap, often interest-free, funding.
As rates rise, that funding becomes more valuable and supports net interest margins, the gap between what banks earn on loans and pay on deposits.
Structural hedges, which lock in rates on part of the balance sheet over several years, mean the earnings boost arrives slowly.
The hit to tangible net asset value, a measure of book value, is more immediate.
Greenwood would not be surprised to see some pressure on that measure in third-quarter results.
Higher rates should also lift banks' cost of equity, putting downward pressure on valuation multiples after a strong re-rating.
Demand under strain
Smaller lenders rely more on interest-bearing deposits, so their funding costs climb quickly.
Passing those costs on risks weakening demand, especially among landlords.
Arbuthnot Banking Group is an exception, with a current-account franchise and no structural hedge, so it should benefit more quickly.
Credit quality remains strong, though Shore Capital notes modest stress in property development finance.
