UK banking stocks should be able to weather the current uncertainty in the mortgage market as the biggest negative is unemployment, which is not yet a feature.
That’s the conclusion of US bank Jefferies, which adds that as 70% of mortgage debt resides in the top four income deciles of the UK population the burden of rising rates in manageable, even if all products reprice to 6%, with no impact on discretionary spending.
Jefferies identifies unemployment as the most significant medium-term factor on credit risk while in the near-term the issue is balance sheet size amidst mortgage repayments/deposit outflows.
“Our loss modelling concludes that whilst loss rates are expected to move modestly higher in '24, the ultimate driver of loss is unemployment, and we do not see this being of material earnings consequence until the unemployment rate surpasses 5%,” Jefferies said.
As a result, Lloyds, Barclays, NatWest, HSBC and Standard Chartered are all buys though are all buys NatWest gets its target price cut to 380p from 420p.
Elsewhere, Barclays says deposits remain the key sensitivity for UK banks with outflows and rising betas ongoing risks.
“But our new work on current account stickiness and mix shift shows resilience longer term, underpinned by a stronger hedge tailwind,” it said.
“We see Lloyds best placed, offering compelling value for those willing to be patient.”
The broker kept an 'overweight' rating but trimmed its price target to 70p from 75p. It has an equal weight rating on NatWest but cut its target to 360p from 380p.