UBS Sees Opportunities in UK Banks, Favors Barclays and NatWest

2 min read | October 01, 2024 10:07 PM AEST | By Team Kalkine Media

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UBS Sees Opportunities in UK Banks, Favors Barclays and NatWest — Image source: Shutterstock

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Highlights:

UBS remains optimistic about UK banks, highlighting stable deposit rates as a key strength.

Interest rate reductions and potential new taxes pose challenges to profitability.

Barclays and NatWest are UBS’s top picks, while Lloyds is rated 'neutral'.

UK banks continue to offer strong opportunities despite recent pressures, according to a report from UBS. The investment bank highlighted a mixed outlook for the sector, with benefits from stable customer deposits but challenges posed by potential policy changes and future tax increases.

UBS pointed to Barclays PLC (LSE:BARC) as its top recommendation, maintaining a 'buy' stance, while NatWest Group PLC (LSE:NWG) also carries a 'buy' rating. Lloyds Banking Group PLC (LSE:LLOY) was rated 'neutral', with UBS considering its shares fairly valued at present.

UBS's analysis noted a stabilisation of deposit rates and growth in sight deposits, which allow instant access to funds. These deposits, while lower-yielding, provide banks with a consistent income stream. However, the bank warned that expected reductions in interest rates could pressure UK lenders to pass those reductions on to customers, potentially squeezing profits.

While UK banks have performed well over the past year, recent months have seen weaker growth. Concerns over third-quarter earnings and the possibility of increased taxation on banks have weighed on the sector. Despite these risks, UBS believes UK banks still present good value compared to European peers, with lower price-to-earnings ratios and solid returns on equity.

Looking forward, UBS expects further improvements in net interest income for UK banks, even as central bank rates decline. The key factor will be how quickly banks adjust their deposit pricing to reflect falling rates. Additionally, the upcoming UK government budget, anticipated at the end of October, may introduce new taxes on the banking sector, adding uncertainty to the outlook.

In morning trading, shares in Barclays, NatWest, and Lloyds remained steady.

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