When the tide goes out, you see who has been swimming without trunks.
In banking, replace trunks with the word hedge. No, not shrubbery, but the book of interest rate swaps that helps smooth earnings when rates move.
On this score, NatWest Group PLC (LSE:NWG), formerly the basket case that was state-owned Royal Bank of Scotland, looks the most comfortable in its trunks.
Citi’s latest sector review puts NatWest among its top picks, alongside HSBC Holdings PLC (LSE:HSBA), while Lloyds Banking Group PLC (LSE:LLOY)and Standard Chartered are consigned to the “neutral” camp.
NatWest’s appeal is straightforward: it trades at about 1.4 times tangible book value, that is, the net assets stripped of goodwill, yet Citi reckons it can earn an 18 per cent return on tangible equity, one of the highest in the sector.
Loan growth is running at 6.6 per cent on an annualised basis, and its maturing hedges should add extra interest income over the next two years. A strong capital position allows for double-digit shareholder returns through dividends and buybacks.
HSBC, meanwhile, remains the UK’s most international lender. Its position in Asian wealth management and transaction banking makes it hard to replicate, while higher Hong Kong interest rates are boosting returns.
Citi believes the bank can sustainably earn a 16 to 17 per cent return on equity, above its formal target, yet it still trades at just 1.4 times book.
Lloyds, by contrast, looks fairly priced. Mortgage churn, the constant refinancing of loans at thinner margins, remains a drag, while its hedge income guidance for 2025 and 2026 is, in Citi’s view, hard to square with reality.
The recent Supreme Court ruling on motor finance mis-selling reduces but does not remove the risk of further charges.
As for Standard Chartered, its restructuring charges muddy the picture.
Citi expects it to hit its 2026 profit targets on an “adjusted” basis, but returns drop back once the costs of cutting costs are included. Revenue growth is expected to run at 4-5 per cent a year, short of earlier ambitions.
The message for investors is clear enough: among the UK banks, Citi favours the steady hedgers. NatWest and HSBC still look like decent cover for choppy waters.