Lloyds Banking Group PLC (LSE:LLOY) has emerged as the least favoured stock in the UK banking sector, according to a new research note from UBS.
While the Swiss investment bank maintains a broadly positive outlook on UK lenders, citing resilient deposit data and strong earnings prospects, Lloyds stands out with a less enthusiastic "neutral" rating.
The caution surrounding Lloyds stems from its comparatively limited upside in the current environment.
Favourable conditions
UK banks are benefiting from favourable conditions, including robust net interest income (NII) driven by maturing interest rate hedges and a stable deposit mix, but UBS highlights that Lloyds’ growth prospects are less compelling than those of peers like Barclays and NatWest.
A key factor is the competitive landscape of deposit pricing. November data from the Bank of England showed a rise in overall deposit volumes, up 0.4 per cent month-on-month, driven by household sight deposits.
Importantly, the shift away from higher-cost time deposits, which fell by 0.2 per cent, has been advantageous for banks, helping to ease funding costs.
Black horse slow out of the stalls
However, UBS notes that Lloyds faces challenges in capitalising on this trend compared to its peers, who have demonstrated greater flexibility in managing deposit betas—the responsiveness of deposit rates to changes in central bank policy.
The recent 25 basis point cut in the Bank of England’s base rate has further exposed discrepancies in the sector.
While banks have been adjusting deposit rates more slowly after recent interest rate cuts, Lloyds seems less able to make the most of this trend to improve its financial position.
Barclays PLC (LSE:BARC), by contrast, is UBS’s top pick among domestic banks, benefiting from a more diversified revenue base and stronger pricing power in its corporate and investment banking operations.
NatWest Group PLC (LSE:NWG), also rated a "buy", is seen as well-positioned to navigate the current environment due to its focus on higher-margin segments.
Attractive valuations
UK banks overall remain attractively valued, trading at just 6.8 times estimated 2025 earnings per share, with an average return on tangible equity (ROTE) forecast at 13.1 per cent.
UBS argues that fears of a cyclical downturn, which have weighed on valuations, are overstated, and the sector is poised for another strong year.
For Lloyds, however, the neutral rating reflects scepticism about its ability to outperform within this backdrop. While the sector’s fundamentals remain solid, Lloyds may struggle to match the returns expected from its more agile competitors.