A top-down argument that banks are facing headwinds given a sharp slowdown in global growth and indicators and rates and credit quality near their best for the cycle is hard to ignore.
However, the fundamental analysis around resilience in income and credit quality suggests an oversold asset class which offers very significant total returns according to UBS.
In the UK, for example, the economy continues to post much stronger than expected growth, inflation and employment.
As a result, the second quarter should see better NII, (net interest income) no real bad asset formation and good capital generation, according to UBS.
Though it says this is probably backwards-looking, it does give a solid, undervalued foundation for dividends and buybacks.
“Given valuations, capital generation and balance sheet strength we are buyers of UK banks.”
On that score, it likes Lloyds Banking best. Barclays has work to do in getting its UK business in shape while NatWest is attractively valued but net interest margin guidance declines each quarter in 2023.
“The narrative at LBG [Lloyds] appears more constructive.”
Standard Chartered is the favourite among the international banks for UBS.
Shares in Lloyds were up 2.85% at 44p.