UK domestic banks remain undervalued relative to European peers despite resilient earnings, strong capital positions and rising returns, JPMorgan said.
The big British lenders were estimated to be trading at just 7.1 times forward earnings, compared to 8.6 times for the broader European sector, with price-to-tangible net asset value at 1.1x for 2027 estimates.
Meanwhile, return on tangible equity (ROTE) is forecast to remain strong, with NatWest Group PLC (LSE:NWG) and Lloyds Banking Group PLC (LSE:LLOY) expected to deliver 18.8% and 17.7% respectively by 2027.
Concerns around an inflection in structural hedge earnings were premature, the analysts said, with structural hedges continuing to support returns as banks under-earn on liabilities.
Tax risks related to the upcoming Budget are "largely" priced in.
Shareholder distributions remain attractive, with the sector forecast to yield around 8% in 2025, rising to 11% in 2027.
JPMorgan expects all three major domestic banks to refresh strategic targets next year, likely focusing on sustainable returns and cost efficiencies.