Keefe Bruyette & Woods has spotlighted Barclays PLC (LSE:BARC), Lloyds Banking Group PLC (LSE:LLOY), and OSB Group PLC (LSE:OSB) as top picks in the UK banking sector, assigning target prices of 240 pence, 65 pence, and 570 pence, respectively.
This selection comes amid a generally positive outlook for UK banks, underscored by a robust 13% total return in share prices year-to-date, marking an overall increase of 19%.
Despite some mixed performance data for March, including flat net mortgage volumes and stable pricing, the firm remains optimistic about the sector's prospects.
KBW anticipates positive margin momentum in the latter half of the year, driven by easing pressures from mortgage churn and deposit mix shifts. This setup is expected to allow beneficial hedge tailwinds to dominate, boosting bank performances.
The sector has shown remarkable resilience, successfully navigating through interest rate rises without a significant credit cycle emerging, the US investment bank said.
With the price-to-earnings ratio for 2025 (PE25) sitting at approximately 6.5 times—about 30% below the 20-year average—and the price-to-tangible book value for 2024 estimates (PTBV24e) at 0.9 times for average returns on tangible equities (ROTEs) of 12%, the valuation metrics are not demanding, KBW added.
Although there are concerns about management's ability to boost margins amidst potential falling rates, these challenges are not expected to impact the sector until the third or fourth quarter of the year, maintaining a stable short-term outlook.
This resilience and future potential make Barclays, Lloyds Banking Group, and OneSavings Bank standout choices for investors looking at the UK banking sector, KBW said.