Lloyds Banking Group PLC (LSE:LLOY) is at the cusp of a potential uplift, according to a recent analysis by UBS.
European banks “look cheap” against historic levels and UK banks “look cheap” compared to European banks, UBS analyst Jason Napier said in a note.
“After a disappointing 2023 in which declining NIM [net interest margin] drove significant EPS downgrades, we think this could be the year for the UK domestics as margins decline elsewhere and the UK economy, mortgage and housing markets, and bank revenues return to growth,” he said.
Despite a challenging year marked by regulatory scrutiny and an industry-wide investigation into motor finance, Lloyds stands out with its significant lending scale and potential for NIM expansion, the Swiss bank’s analyst highlighted.
The UBS insight comes as the UK banking sector enjoyed a year of recovery and growth, helped by improved interest rate margins.
The analysts noted that anticipated structural hedge gains are feeding through into margins and are driving an improvement in the banks’ financial health into 2025.
Lloyds is rated as a ‘buy’ at UBS, with the analyst team evidently confident in the bank’s capacity to navigate regulatory challenges whilst capitalising on NIM expansion. With a price target of 50p, the Swiss bank sees around 16% upside to the current price.
One point of caution from UBS is that Lloyds is among the lenders more exposed to the pending clampdown on motor finance business – having the second highest risk after Close Brothers.
In a broader analysis of the UK banking sector, UBS sees 2024 as a pivotal year.
The analyst team sees valuations as attractive, generally.
Barclays PLC (LSE:BARC) is rated as a ‘buy’ with a price target of 200p, suggesting some 33% upside from the current price level. The analysts noted Barclays' diversified operations and lower risk exposure in regards to motor finance as supportive of its bull case.
For NatWest Group PLC (LSE:NWG), meanwhile, the Swiss Bank also has a ‘buy’ rating, with the team pointing to its more conservative lending approach among the investment factors.