Fears over the UK budget have hung over the banking sector for months, but Deutsche Bank argues that the worry is starting to look overdone.
The note’s central point is that, whatever the chancellor announces, markets are likely to move on quickly to the next catalyst: the Bank of England’s forthcoming capital review.
That review, Deutsche says, could be a meaningful positive for the most domestically focused banks, which stand to gain if regulators decide that lenders can operate with lower capital buffers.
The budget itself has been a heavier drag on valuations for specialist lenders, which are seen as more exposed to potential tweaks in bank taxation or changes to buy-to-let rules.
Deutsche takes a more sanguine view. It thinks specialist lenders have a good chance of being shielded from any extension of the bank surcharge and questions whether further landlord regulation would do much to disrupt the ongoing “professionalisation” of the buy-to-let market.
Amateur landlords have been exiting for years, and that trend, the analysts argue, is bigger than any marginal policy shift.
There are additional reasons for cautious optimism. Lower capital requirements would free up balance sheets, while December’s MREL changes should offer an extra tailwind.
With more excess capital sloshing around the system, Deutsche also sees a rising likelihood of consolidation, with smaller players looking increasingly like attractive targets.
Against this backdrop, the bank lifts price targets for NatWest Group PLC (LSE:NWG), HSBC Holdings PLC (LSE:HSBA) and OSB Group PLC (LSE:OSB), saying that in a market paralysed by budget fear, sentiment itself may be the biggest mispricing.