JP Morgan has said it expects UK banks to upgrade their revenue forecasts for 2026 after a sharp repricing of interest rate expectations, with the Wall Street bank's analysts flagging NatWest Group PLC (LSE:NWG) and Lloyds Banking Group PLC (LSE:LLOY) as the most likely candidates for guidance increases.
The note, authored by analysts Sheel Shah and Kian Abouhossein, argues that short-term interest rate (STIR) markets have moved more dramatically in the UK than elsewhere, with forward pricing now implying one rate rise compared with two cuts expected before the Iran war began.
Net interest income (NII), the difference between what banks earn on loans and pay on deposits, stands to benefit as a result.
JPM said five-year swap rates, a benchmark used by banks to lock in returns on future lending, had risen 55 basis points (0.55 percentage points) since the conflict began, driving a more favourable income outcome through the reinvestment of maturing hedges at higher rates.
The analysts said they had upgraded their earnings per share forecasts for domestic UK banks by 1-2% for 2027 and 2028, now assuming flat rates through 2026 and one cut in 2027, compared with a prior assumption of two cuts in 2026.
For NatWest, JPM expects the bank to upgrade its 2026 revenue guidance to approximately £17.7 billion, excluding its Evelyn Partners wealth management business, against current guidance of £17.2-17.6 billion.
For Lloyds, it expects 2026 NII guidance to be lifted to around £15.0 billion from the current steer of approximately £14.9 billion.
The US investment bank acknowledged that asset quality, a measure of how likely borrowers are to repay their debts, remains the key uncertainty, but said it took comfort from the limited stress seen during the 2021-23 rate-hiking cycle and from improved household and business balance sheets.
Assuming no significant deterioration in loan quality, the bank said UK domestic lenders were on course for a return on tangible equity (ROTE, a measure of profitability relative to book value) of around 20%, at what it described as attractive valuations.
JPM said it continued to favour UK exposure within a European context through NatWest, Barclays and Standard Chartered.