Banks in the UK have the best outlook of all those based in Europe, according to analysts at Panmure Liberum ahead of the start of the third quarter reporting season tomorrow.
European banks have been the best-performing sector this year with total returns of more than 30%, notes the broker, helped by earnings upgrades during the year.
But with a slowdown in net interest income and risks to margins and lending volumes in Europe, UK lenders with more growth potential look a better bet it says.
In the UK, says Panmure Liberum, the sectors driving weakness in the Eurozone—particularly manufacturing—make up a smaller share of GDP.
The UK economy is more heavily skewed towards software and financial services, the sectors currently leading global growth, it adds.
This has two main consequences. “First, lending volumes are expected to expand more quickly in the UK than in the Eurozone, giving UK banks a stronger footing in this environment.
“Second, margins are likely to contract compared to 2023 levels, especially in countries facing a flatter yield curve.
“Again, Eurozone countries are more prone to this, with weaker growth, low inflation, and lower central bank rates contributing to the pressure.”
As an example, Panmure points out that Barclays PLC (LSE:BARC) tops the rank in net interest margins with 62% of revenues generated in the UK and 37.3% in the US.
Following in the margins ranking are Lloyds Banking Group PLC (LSE:LLOY) and NatWest Group PLC (LSE:NWG), both even more heavily exposed to the UK (100% and 95% of revenues, respectively).
Panmure Liberum notes that Barclays, Lloyds and Natwest have all surprised on the upside in the last annual and quarterly updates adding that, In the UK, credit growth reached 1.5% YoY in September, up from a 0.6% low in December 2023.
Both mortgages and consumer credit have contributed to this increase (with 0.7pp and 0.8pp, respectively), notes the broker, following several
months of improving consumer confidence and business sentiment helped by post-election certainty, lower interest rates and lower inflation.
“We think a sustained increase in lending activity is likely in the UK.”
Lloyds, which reports tomorrow, was up 0.5% today at 62.1p, Barclays by 0.4% at 240.6p with Natwest flat at 357.2p.