Ranking Lloyds, Barclays and NatWest: Which UK bank has further to run?

UBS maintains a constructive outlook on UK banks, asserting they have largely closed their valuation gap with European peers and anticipating an upward re-rating for the sector over the next 12-18 months. Barclays and NatWest are rated "buy" with raised price targets of 415p and 553p respectively, driven by factors such as undervalued shares, robust earnings, and strong cash generation. Standard Chartered also received a significant upgrade to 1446p, while Lloyds and HSBC remain "neutral." Despite some softening in product margins and mortgage volumes, rate hedges and resilient corporate/investment banking activity are expected to provide offsets, particularly for NatWest and Barclays, indicating attractive UK bank valuations and potential for further upside.

Analysis

According to a recent UBS report, the outlook for UK banks is constructive, with the sector having largely closed its valuation gap with European peers and poised for a potential upward re-rating over the next 12 to 18 months. UBS has designated Barclays and NatWest as its top picks, issuing "buy" ratings and raising price targets to 415p and 553p, respectively. The positive thesis for Barclays is centered on its undervalued share price and robust earnings from its corporate and investment banking arms, while NatWest is favored for its premium returns on equity and strong cash generation. Standard Chartered also received a significant target price increase of approximately 20% to 1,446p, reflecting optimism around its wealth management and trading divisions, complemented by cost-cutting initiatives and share buybacks. In contrast, Lloyds and HSBC were assigned "neutral" ratings with more modest target adjustments to 75p and 935p. While the report acknowledges sector-wide headwinds, such as softening product margins and mortgage volumes in the second quarter, it posits that these will be mitigated by rate hedges and supportive conditions in corporate and investment banking, which particularly benefit Barclays and NatWest.

Key Decisions for Investors

• Investors should consider the relative outperformance potential of Barclays and NatWest, which UBS identifies as 'buy' rated based on undervalued shares, robust earnings, and strong cash generation.
• Standard Chartered offers a distinct opportunity, with a significant 20% price target upgrade driven by expected growth in wealth management and trading, alongside capital returns from buybacks.
• Holders of Lloyds and HSBC should note the 'neutral' ratings, which, despite modest target increases, suggest more limited upside compared to preferred peers in the sector.
• Monitor the impact of softening mortgage volumes, but recognize that UBS expects rate hedges and strength in corporate and investment banking to provide a significant offset, especially for Barclays and NatWest.
• The overall constructive view from UBS on a sector-wide re-rating provides a supportive macroeconomic backdrop for maintaining or increasing exposure to UK banking equities.