Lloyds Banking Group PLC (LSE:LLOY) and Standard Chartered PLC (LSE:STAN) shares offer the most potential update from expected rising net interest income for lenders as the Bank of England lifts rates ever higher, according to JPMorgan.
As banks enjoy the improvements in net interest income (NII) from rate rises so far in 2022, JPMorgan analysts said they see the FTSE 350-listed lenders as "defensively positioned from a capital perspective", with normalised return on tangible equity (RoTE) on higher rates expected to zoom faster than expected to around 11-16%.
However, medium-term risks are higher, the analysts noted.
They believe that new prime minister Liz Truss and chancellor Kwasi Kwarteng's recent announcement of support for energy bills is "likely" to result in the Bank of England's monetary policy committee raising interest rates to 4% next year, which obviously means households and businesses will pay more for mortgages/loans.
"Although this package and further stimulus in the form of lower tax rates is incrementally helpful for NII and near-term asset quality will stay resilient, medium term risks are higher with rates heading to a level where debt serviceability could be an issue for some borrowers."
In other words, bad debts could swell.
Also, the JPM analysts said the probability of recession is "higher" in 2023, so they assume that the MPC will cut the base rate to 3% in 2024.
Despite this, their NII forecasts are 5% above consensus for 2023/24, but earnings per share estimates are below consensus due to higher impairment assumptions (no doubt from the worries about debt serviceability).
For Lloyds, the analysts upped their EPS forecasts by almost 2% to 6.93p for this year and 3.5% to 6.98p for 2023 and for NatWest Group PLC (LSE:NWG) by 7% to 34.74p and 10.5% to 39.44p respectively.
JPM's pecking order remains as follows: Lloyds, Natwest, Barclays PLC (LSE:BARC), Virgin Money UK PLC (LSE:VMUK), Close Brothers Group PLC (LSE:CBG) within the domestic, and StanChart over HSBC Holdings PLC (LSE:HSBA) for the international.
From a bottom up perspective, the analysts said they see "the highest incremental upside" in Lloyds and StanChart, followed by NatWest.
Price targets for Natwest were upped to 350p from 330p and for VMUK to 200p from 190p.