UBS has reiterated its positive stance on UK banks, arguing that the sector is poised to re-rate as macroeconomic conditions stabilise and interest rate fears ease.
The investment bank maintains an overweight position on UK domestic lenders, noting that they combine modest valuations with some of the strongest forecast returns in the European banking landscape.
It expects the wider European banking sector to re-rate to around 10 times forward earning, equating to a 25% discount to the broader market, once confidence in the interest rate outlook improves.
Within the UK cohort, UBS has 'buy' ratings on Barclays PLC (LSE:BARC), NatWest Group PLC (LSE:NWG), and Paragon Banking Group PLC (LSE:PAG), underpinned by expectations of robust revenue growth and capital distribution.
These lenders, it said, are well placed to benefit from structural hedges and improving loan growth across the board.
Despite a recent narrowing in mortgage spreads and lower mortgage volumes, the firm sees continued outperformance in deposit spreads and mix, as well as resilient free cash flow generation.
UBS is watching for potential changes from ringfencing reforms and the upcoming Mansion House speech on 15 July, which may give further clues on the government’s approach to promoting bank-led economic growth.
The latest Bank of England data for May showed UK household deposits rose 0.4% month-on-month, while corporate deposit volumes declined.
Time deposits, including cash ISAs, remained stable at 33.6% of total deposits. UBS sees these trends feeding into a solid second-quarter reporting season, which begins with Lloyds Banking Group PLC (LSE:LLOY) on 24 July and concludes with Standard Chartered on 31 July.
The firm values UK domestic banks at 7.6x FY26 earnings for a return on tangible equity of nearly 15%.
Despite the upbeat message from UBS, the FTSE 350 Banks benchmark was down 1.5% on Tuesday at 5,851.83.