Lloyds Banking Group PLC (LSE:LLOY) was highlighted as 'top pick', Virgin Money UK PLC (LSE:VMUK) was upgraded but Barclays PLC (LSE:BARC) downgraded by JPMorgan against a background of the Bank of England hiking rates but the UK economic outlook becoming less clear.
Higher inflation and downwards revisions to economic growth are "starting to cloud the positive case for the banks," analysts at the investment bank said.
Many analysts had been taking a more positive view on the UK lenders as the Bank of England lift interest rates, with three hikes in three meetings so far this year.
Scrutinising the lender's deposit bases on which they earn interest and which drives the upside from rates, the analysts concluded that the current rate hike cycle is "more positive for banks' NII [net interest income] relative to market expectations" and relative to the 2017 rates cycle.
JPMorgan reiterated its view that Lloyds is "best positioned", followed by NatWest Group PLC (LSE:NWG), where there is "scope for continued tailwinds from higher rates to flow back to shareholders".
Some of the NII drivers however are thought likely to "start to turn" in the second half of the year and the analysts' earnings forecasts are now below the City consensus across the board "due to higher cost of risk which is not reflected in consensus".
Barclays was downgraded to 'neutral' from 'overweight' with a share price target of 170p from 220p, "as we no longer see a catalyst for unlocking the valuation discount for the [corporate and investment bank], alongside potential for higher costs (legal) and a more challenging non-NII outlook".
Virgin Money was also upgraded to 'neutral' from 'underweight' based on the upside to net interest margin and a buyback "offsetting the ongoing cost negatives".