If the run-up to Rachel Reeves' Budget next month has left investors wary of British banks, UBS is not joining the caution.
Its analysts have kept their “overweight” stance on the sector, arguing that cheap valuations and strong earnings momentum make the risk worth taking.
They say most traditional long-only investors are sitting tight until after the 26 November budget, unsure how the Treasury plans to plug what it calls a fiscal gap of £10–$30 billion.
Hedge funds, though, are reportedly more upbeat, spotting value in the sector’s solid returns on tangible equity, faster loan growth and improving deposit mix.
UBS thinks these trends will translate into the strongest revenue growth of any European banking market over the next couple of years.
Its top picks are the domestically focused names (Barclays PLC (LSE:BARC), NatWest Group PLC (LSE:NWG) and Paragon Banking Group PLC (LSE:PAG))alongside Standard Chartered among the internationals.
HSBC, by contrast, is rated neutral. UBS expects the coming third-quarter results season to extend the healthy momentum seen in the spring.
The key political question is whether the budget brings another tweak to the bank surcharge, which currently sits at 3%. UBS thinks a rise to around 5% is plausible, but expects any impact to be passed on to customers rather than eating into profits.
The bank doubts the government will pursue wider changes, arguing ministers still see a strong financial services sector as central to economic growth and investment.
Mortgage lending could slow into the autumn as landlords and buyers wait to see whether stamp duty or buy-to-let tax changes are in store. UBS is sceptical that higher landlord taxes would do anything to ease Britain’s housing shortage.
Earnings forecasts remain robust. The bank expects the UK lenders to grow earnings per share by between 4% and 19% in 2025, by 27% in 2026, and by 6% to 17% in 2027.
Returns on tangible equity are expected to hold at around 14.7% to 15% over the period, supporting dividend yields of roughly 8.5% to 9.2%.
On valuation, UBS notes the domestics trade at just 7.9 and 7.1 times forecast 2026 and 2027 earnings, cheaper than their continental peers.
Even the international names, at around nine times, still look good value. Policy risk may be keeping sentiment gloomy, but on these numbers the City’s big banks could yet turn out to be the contrarian’s friend.