UK bank earnings season starts again on 24 April when Lloyds Banking updates, notes UBS, adding the domestic operators still look good despite an impressive share price run since the start of 2024.
NatWest (total return 31%), Barclays (23%) and Lloyds (11%) have performed well year-to-date but UBS has upgraded its targets for all three and the more in international-focused HSBC.
For a start, it notes net interest incomes from the quartet are set to rise in the second half of 2024 in a falling yield environment.
And, this is available to buy at a material discount to the European bank sector average earnings multiple.
Motor finance uncertainty remains a factor for Lloyds and Close Brothers but Barclays (UBS’s top pick) and NatWest present less uncertainty.
By bank, Barclays' target price goes up to 240p from 230p with the new strategy announced in February impressing UBS.
Indeed, “we can’t think of anything more which could have been done to produce a more investor-friendly package,” is its conclusion.
UBS points to Barclays' guidance of £3 billion in dividends and buybacks in 2024 or 11% of market cap, including substantial RWA [asset] inflation in 2024 (US cards £16 billion, Tesco Bank £8 billion, organic growth £10 billion).
Lloyds target rises to 58p from 53p despite the uncertainty over the motor finance probe.
“A £2 billion share buyback and 175bps capital generation target for FY24 suggest confidence that overall risks are manageable,” adds UBS.
“With strong expected FCF distribution, we continue to see [LBG] valuations as attractive
NatWest gets the biggest upgrade, however, to 315p from 265p,
“We like NWG for growing NII, improving operating leverage in 2025/6 and a lack of historic dealer distributed motor finance issues, available at a valuation we continue to see as attractive.
HSBC’s target is upped to 630p from 620p. “ With the US$ rate curve now including 2 rate cuts rather than the 6 at the start of the year, there's room for an improved outlook to be shared at 1Q, we think, which may be powerful given the forthcoming 21cps special dividend in 2Q."