UBS has named Barclays its top large UK bank pick after Bank of England figures showed business lending growing at close to 10% a year.
Corporate lending rose 1.7% in August alone, taking annual growth to 9.6%, up from 9.1% in July and 6% a year earlier.
Total UK lending grew 0.7% in the month and 4.9% over the year, compared with 3.7% a year ago and just 1.1% two years ago.
Consumer credit grew 6.1% on the year, while mortgage growth held steady at 3.3%.
UBS said businesses are taking on debt again across Europe.
Stronger than expected
Banks had warned at recent investor conferences that the third quarter could be slower for lending after a strong first half.
UBS said the industry data has not borne that out, at least not yet.
Loan yields are also moving in the banks' favour.
Rates on existing loans rose 0.03 percentage points in August, while rates on new loans climbed 0.2 percentage points, driven by household lending.
Deposit battle
The picture on deposits is less comfortable.
Banks are competing hard for savers, particularly through fixed-term cash ISAs, which grew 0.5% in August.
Rates offered to households on new fixed-term deposits have risen about 0.47 percentage points this year.
Lenders have argued they can compete where it makes sense and have cautioned against comparisons with 2023, when savers moved heavily into higher-paying accounts.
UBS noted the shift towards fixed-term deposits is happening more slowly than in 2023.
Valuation
The UK domestic banks trade on 8.2 times forecast 2027 earnings and 1.5 times tangible net asset value, for a return on tangible equity of about 18%.
UBS said that implies investors are demanding a return of 12.4%, well above the 10.3% for the European sector as a whole.
The broker likes the UK names within its overweight stance on European banks, citing structural hedges, which lock in income from rates over several years, along with loan growth and the valuation discount.
Alongside Barclays, it rates Lloyds Banking Group and NatWest as Buy.
Among smaller lenders, Shawbrook is its top pick, with Buy ratings also on Close Brothers and Paragon.
