Barclays Plc is the top pick in “cheap” UK banking sector says UBS

Barclays PLC (LSE:BARC) and HSBC Holdings Plc are fancied most by analysts at UBS which, in a note, described London’s banking stocks as “cheap, over-capitalised, over-positioned and rate geared.”

Analyst Jason Napier highlighted that UK banks beat the market’s consensus forecasts by some 25% and saw a 2% income beat, and, the sector is presenting a buying opportunity “worth grasping”.

“Despite a 20% YTD rally, UK banks have de-rated this year given a 30% increase in 2022 EPS forecasts (9% QoQ) leaving the stocks at a 15% discount to the Eurobanks sector at 7.8x 2022E EPS and a remarkable 6.6x ex excess capital,” Napier said.

The analyst added that the sector offers the best-valued combination of interest rate gearing, along with excess provisions and capital returns.

“We are positive on UK banks given our absolute return recommendation framework and, more importantly, imminent positive cyclical factors which we do not see as being reflected in current valuations (e.g. policy rate increases, write-backs of loan loss reserves, clarity on dividends and buybacks),” Napier added.

“While we have no ‘edge’ as to the near-term trajectory for the UK potentially invoking Article 16 in respect of the Brexit agreement around Northern Ireland, we see UK bank balance sheets as in very good shape overall to absorb volatility from that source.”

Barclays was singled out as the Swiss Bank’s ‘top large-cap domestic bank pick’, it is rated as ‘buy’ with a 250p price target that suggests some 28% upside to the current share price.