Lloyds Banking Group PLC (LSE:LLOY) is the best investment among the UK banks, said JPMorgan after the Bank of England warned of double-digit inflation and a growing recession threat.
The Bank’s monetary policy committee (MPC) delivered a “mixed message” with its latest quarter-percent rate hike, with inflation now expected to exceed 10% and GDP growth forecasts close to a recession for 2023.
Despite that, JPMorgan’s economists still see rates peaking at 2.5% by August 2023 “driven by the ongoing resilience of labour market”.
From the perspective of UK banks, JPM’s banking analysts said they see “downside" to consensus earnings forecasts for the sector from the worsening macroeconomic factors, but argue that capital levels are “likely to remain resilient” as banks have been holding higher cash buffers in anticipation of a planned increase in BoE stipulations.
Given the economic backdrop, with unemployment forecast to decline further this year before rising to 5.5% by 2025, the analysts said they expect the cost of equity to “stay elevated in the near term”.
Lloyds is the preferred bank for its circa 10% total return yield with an ongoing share buyback and shares trading at 7.3 times 2024 earnings and a price-to-tangible-net-assets of 0.8 times.
For Lloyds every 0.25 percentage point increase in the UK yield curve would generate additional net interest income worth 3% of 2024 profit before tax.
NatWest Group PLC (LSE:NWG) is seen as benefitting most at 7% of PBT, 4% for Barclays PLC (LSE:BARC) and 2% for Virgin Money UK PLC (LSE:VMUK), based on disclosed sensitivities.
However, “the benefit as rates move higher will continue to reduce”.