JP Morgan remains upbeat on the outlook for UK banks, pointing to resilient interest rates, steady cash generation, and undemanding valuations as the key reasons behind its positive stance.
Following meetings with senior management across the sector, analysts say most lenders are delivering operationally despite fiscal headwinds and an uncertain global backdrop.
The UK may be feeling the pinch on the public finance side, but it has remained relatively insulated from recent trade tensions and tariffs.
Meanwhile, a slightly more permissive regulatory tone, reflecting the government’s pro-growth messaging, could eventually help lower the sector’s cost of equity towards 10%.
Still, there are a few pressure points to watch. Mortgage margins have tightened, with some banks now pricing below the cost of capital. Deposit competition also ramped up during the recent ISA season, though there's no sign yet of a major shift in customer behaviour.
On the plus side, wealth management and financial markets divisions are performing well, and the opportunity to deepen corporate banking relationships remains a long-term growth lever.
Mergers and acquisitions are also back on the radar, particularly for NatWest Group PLC (LSE:NWG) and HSBC, though with disciplined criteria.
JP Morgan prefers domestic-focused names like Barclays PLC (LSE:BARC) and NatWest, both rated overweight and top European picks, over Lloyds, which it sees as less compelling due to valuation and litigation risk.
Asian-facing UK banks, such as Standard Chartered PLC (LSE:STAN) and HSBC Holdings PLC (LSE:HSBA), face more exposure to the current turbulence in trade and capital flows, especially with ongoing uncertainty around US tariffs.