After years of tight regulation and tepid sentiment, the outlook for Britain’s banks is brightening. JPMorgan argues that falling capital requirements, a fading threat of new taxes and improving returns are paving the way for valuations to catch up.
The Bank of England’s review of its capital framework, due on 2 December, could mark a turning point.
The focus will be on the so-called Pillar 2A and counter-cyclical buffer, the two elements that determine how much extra capital banks must hold beyond minimum standards.
JPM expects the outcome to support lower overall capital targets across the sector, a change that would free up cash for dividends and buybacks.
Among the big names, NatWest Group PLC (LSE:NWG) stands out. The bank currently sits on a 200-basis-point surplus over its minimum capital requirement, the largest cushion among its peers.
JPM sees scope for NatWest’s common equity tier one (CET1) target to fall from 13-14% to about 13% by 2026, implying around £14 billion of distributions between 2025 and 2027, well ahead of market expectations.
In a more bullish scenario, the target could fall to 12.5%, unlocking another £1 billion.
Return on tangible equity, or ROTE, is projected to strengthen to almost 19% by 2027. Combined with the government’s ongoing deregulatory push, that could lower the cost of equity for the whole sector.
For a market long overshadowed by policy risk, the regulatory tide may finally be turning in the banks’ favour.