JP Morgan analysts have reiterated their positive outlook on UK banks, particularly highlighting NatWest Group PLC (LSE:NWG) and Barclays PLC (LSE:BARC) as top picks in the sector.
After meetings with senior leadership for the leading operators, it highlighted the duo because of their resilient profit margins, strong cash generation, and high returns.
Natwest, in particular, stands out because continued privatisation after the upcoming elections could lead to an increased valuation as the UK government's stake in the bank becomes less significant, the American investment bank said.
Despite this optimism, the analysts noted some challenges ahead: Mortgage volumes are expected to remain low until interest rates decrease.
Additionally, Lloyds may face slower revenue growth through 2025 due to high 'back book' mortgage spreads, JPM's number crunchers noted.
Competition for customer deposits has been in line with expectations. In June, many major banks reduced their interest rates on deposits, a trend that may continue following an anticipated rate cut in August, they added.
Political factors also play a role in JPM's outlook. Some bank executives expect rapid policy reforms from a potential Labour government, which could boost economic growth in the medium term.
Encouragingly, Labour leader Keir Starmer recently ruled out further taxes on banks, which could help alleviate the high cost of equity that UK banks have faced since 2016.