UBS remains upbeat on the outlook for UK banks ahead of the first-quarter earnings season, with strong balance sheets, attractive valuations and resilient credit quality underpinning the broker’s positive stance ahead of reporting season early next month.
Shares in Barclays PLC (LSE:BARC), NatWest Group PLC (LSE:NWG) and Standard Chartered PLC (LSE:STAN) are the Swiss bank's top picks in the sector, with analysts highlighting their exposure to robust trading income and attractive capital returns. It has lifted its price target for Barclays to 360p, implying nearly 50% upside from current levels, and reiterated its “buy” rating.
UK domestic lenders look well placed, UBS's analysts reckon, citing strong net interest income supported by hedge returns, relatively modest provisioning needs and a less severe tariff-driven growth shock than in the eurozone.
They expect the major high street lenders to deliver return on tangible equity of around 14% in 2025, even as economic uncertainty and new trade policies weigh on broader investor sentiment.
Valuations across the sector are appealing, with UK bank stocks trading at just 6.6 times forecast 2026 earnings, a discount to historical averages.
Barclays trades on just 4.8 times earnings, while NatWest sits at 6.6 times, and Lloyds Banking Group PLC (LSE:LLOY)at 7.0 times. Dividend yields are equally compelling: 6.5% at NatWest, 5.4% at Lloyds and 3.6% at Barclays, before including buyback yields.
The broker noted that while the UK economy is not immune to global trade tensions and the impact of higher US tariffs, it is less exposed than European peers due to differences in fiscal stimulus and export composition.
UBS expects the Bank of England to hold interest rates relatively steady this year, with some potential downside later if growth slows further. Against that backdrop, it expects UK lenders to maintain good top-line growth and sees few signs of a deterioration in credit quality.
On a stock-by-stock basis, UBS views Barclays as particularly well positioned, citing the strength of its investment banking division and upside from its trading business. The firm expects sales and trading income to more than offset weaker advisory revenues, a common theme across investment banks amid a slower deal-making environment.
At NatWest, UBS is watching for updates on net interest margin trends and sees the stock benefiting from solid capital generation and capital return potential.
While the broker cut its price target slightly to 500p, it maintained a “buy” rating. Standard Chartered also remains a top pick, with the bank seen as oversold relative to earnings power, although ongoing uncertainty around China and US trade relations remains a headwind.
UBS was more cautious on HSBC, where it retained a neutral stance and trimmed its target price by 15% to 820p. The bank’s exposure to Asia and China, combined with recent strategic changes, is expected to keep sentiment subdued in the near term. Meanwhile, Lloyds remains a “neutral” call, although UBS acknowledged its strong cash generation and potential for attractive dividends in 2026.
First-quarter results are not expected to throw up major surprises, with UBS forecasting “solid but unspectacular” numbers. The key investor focus, it said, will be on commentary around margins, provisions and exposure to macro and policy risk in the wake of escalating trade tensions.
For now, the broker believes the UK bank sector offers value and a defensive income stream, even in an uncertain economic climate.