UK bank valuations are attractive but Lloyds Banking Group PLC (LSE:LLOY) is less so than Barclays PLC (LSE:BARC) and NatWest Group PLC (LSE:NWG) among the more domestically focused lenders, for analysts at UBS.
Ahead of an expected Bank of England interest rate cut later this week, the analysts said they recommend UK domestic lenders given tailwinds for net interest income (NII) driven by interest rate hedges, versus their current "attractive" valuations.
Upcoming fourth-quarter updates from the sector should be interesting, UBS reckons, with potential strategic shifts at Barclays in US cards, at Lloyds in respect of motor provisions and potential share buybacks, and at NatWest with possible M&A mooted.
"The UK economy is substantially positively geared to lower rates," the analysts said, noting that in early January higher US bond yields drove UK gilt yields up and well-owned stocks like NatWest down on sterling weakness and fears that BoE rates might be kept "uncomfortably high".
"That vulnerability remains given a fluid US environment but we still see UK banks as substantially under-priced," they added, citing forecasts for hedge-driven growth and distributed yields, with higher terminal rates and the possibility of a more pro-growth policy stance from the government also upside options.
Barclays and NatWest are UBS's top picks, with Lloyds results expect to see a focus on motor finance, share buybacks and the 2026 hedge tailwind.
As for the more overseas-looking banks, HSBC Holdings PLC (LSE:HSBA) and Standard Chartered PLC (LSE:STAN) have gained 5.6% and 8% respectively in the year to date.
"Both benefit from hopes that higher US$ yields will support margins with the key risk that those gains are offset by lower loan growth in Hong Kong in particular given the rate differential with mainland China," the analysts said.
For HSBC, media headlines around have raised expectations about cost cuts but what the analysts think matters most would be more concrete guidance, helped potentially by higher US dollar rates, but potentially dented by disposals and likely lower loan growth.
The key questions at the results will be around the magnitude of restructuring charges, and clarity of new targets for NII, costs and payouts would be needed "to shift the debate".
StanChart is the UBS pick of the two, with 17% per year forecast EPS growth, trading at 6.0 times 2026 earnings and "is less dependent on credit growth given its revenue mix but NII in the near term remains a focus as the bank refreshes guidance".