Analysts at KBW are staying positive on UK banks despite this week’s politics-triggered sell-off in the sector.
The recent share price weakness to political uncertainty rather than fundamentals, the broker said in a note.
Apparent uncertainty, or at least hesitancy, on Downing Street precipitated a 3% decline for UK bank shares, wiping around £4.5 billion from the sector’s market capitalisation.
It came as Prime Minister Sir Keir Starmer delay backing Chancellor Rachel Reeves during Prime Minister’s Questions, and was followed by widespread speculation in media and social platforms.
A Downing Street spokesman has since stated that Rachel Reeves has the prime minister's 'full backing', whilst it was later reported that the Chancellor’s visible discomfort during PMQs was related to a 'personal matter'."
More widely, however, the incident raised questions about the long-term stability of the Labour government.
KBW analysts said that while Starmer holds a 174-seat majority, internal divisions within Labour (especially over the amended Welfare Reform Bill) highlight difficulties in maintaining control, which in turn may weigh on investor sentiment.
UK banking shares, acting as a close proxy on Britain’s general economic health, in turn saw weakness.
Nevertheless, in the KBW note, analysts said they were positive on the UK incumbent banks, given strong earning momentum and “cheap valuations”.
Barclays PLC (LSE:BARC) and NatWest Group PLC (LSE:NWG) in particular, are both forecast to deliver tangible book growth + dividends in excess of +30% by FY26e,” KBW said in a note.
“Clearly government instability is unhelpful, but (i) any challenge to the PM is unlikely to materialize near term; and (ii) the bond markets, who are the principal concern, seem significantly more relaxed at this stage than equity markets.
“We acknowledge the risks around a potential increase in existing bank taxes to help address any fiscal shortfall, but continue to believe that this is unlikely near term.
“We remain positive UK Banks.”
KBW rates both Barclays and Natwest as “overweight”, with respective price targets of 350p (Barclay current price: 330p) and 570p (currently: 481p).