UK banks are heading for smaller profits in 2024 as expectations of falling interest rates lead to fierce mortgage completion, analysts at Bank of America said, selection Lloyds Banking Group PLC (LSE:LLOY) a top pick in the sector.
BofA cut their earnings estimates for the year for UK banks by between 7-12% in a note to clients on Friday, while making bigger reductions for 2025 earnings forecasts.
Domestic UK banks net interest margins are predicted to continue falling to the third quarter this year, with Lloyds the most resilient, before a recovery in 2025.
After lacklustre 2023 loan growth, there are signs of improvement due to the prospect of falling rates, with mortgage rates already falling and house prices and housing sentiment modestly improving.
Analysts at the bank said "a shallower margin decline, more non interest income support and a substantial Q4 buyback make Lloyds our top pick."
In contrast, they cited "weak profitability and capital distributions" from Barclays PLC (LSE:BARC) and Virgin Money UK PLC (LSE:VMUK), both of which have 'underperform' ratings.
If recent sharp falls in market interest rate expectations play out, they will accelerate the compression on deposit spreads in 2024 and moderate subsequent margin expansion, though deal volumes will be supported and asset quality too.
BofA rates Lloyds 'buy' and NatWest Group PLC (LSE:NWG) too, where it sees low-mid teens RoTEs and sustained mid teens yields.
"Non interest income can help to offset margin pressure, particularly for Barclays where it contributes 50% of income and for Lloyds where we expect continued high single digit growth," it said.
Lloyds is rated 'buy' with a 59p price target, with NatWest also a 'buy' with a 290p price target.