After a surprisingly upbeat earnings season, the latest Bank of England data suggest the good news for UK lenders has some staying power.
UBS analysts Jason Napier and Sanjena Dadawala note that September’s figures point to accelerating loan growth and a healthier deposit mix, reinforcing the improving trend already visible in third-quarter results.
UK bank shares have outperformed their European peers by around 3% this earnings season, helped by underlying profit beats and steady credit quality.
UBS has lifted its earnings forecasts for the sector by 3% to 5% for 2025 to 2027 and remains overweight on the domestic names, which it says still trade at a steep discount to their continental rivals despite stronger profit growth.
Industry-wide lending rose 1% quarter on quarter, with mortgages up 0.3% month on month and corporate loans up 0.5%. Year on year, overall lending expanded by 3.8%, compared with just 1.5% a year ago.
Corporate lending jumped 6.4% despite subdued business sentiment, while mortgage growth of 3.1% suggests households remain confident enough to borrow.
Importantly, average loan yields have held steady even after 125 basis points of rate cuts since mid-2024, as higher back-book mortgage rates have offset lower corporate yields.
Deposits also grew modestly, up 0.7% month on month, led by a 1% rise in sight accounts while time deposits were flat. Households and corporates both increased balances in interest-bearing accounts.
The share of time deposits slipped to 33.3% of the total, and the average UK deposit rate fell slightly to 2.05%.
UBS values UK banks at about 8 times next year’s earnings, or 1.3 times tangible book value, for a sector return on tangible equity of roughly 16%. Its preferred picks remain Barclays PLC (LSE:BARC), NatWest Group PLC (LSE:NWG) and Paragon Banking Group PLC (LSE:PAG), with the analysts describing the UK sector as quietly regaining its stride.