During the last hiking cycle of 2017 to 2018, UK banks outperformed the sector by 8% from 90 days prior to the first hike to the second and final hike
Despite the Bank of England unexpected inaction over interest rates at its last meeting, the outlook for the UK high street banks remains positive, one investment bank reckons.
JPMorgan said its ‘house view’ remains that the BoE will raise rates over the next few months, with a December hike expected and the base rate lifted by 65 basis points by the end of 2022.
Markets are more hawkish, having repriced the interest rate outlook to around 93bp of tightening priced by the end of 2022 and a peak of +103bp of cumulative hikes by the end of 2023.
Incorporating the market’s view of the interest rate outlook, that would imply 3-9% pre-tax profit upside to 2023 estimates, the analysts said, based on banks’ disclosed interest rate sensitivities.
During the last hiking cycle of 2017 to 2018, UK banks outperformed the sector by 8% from 90 days prior to the first hike to the second and final hike, it was noted.
Furthermore, JPM sees net interest income being driven higher as mortgage market normalisation continues and consumer finance recovers in 2022.
Overall, Barclays PLC (LSE:BARC) is the top pick for the sector for JPM, followed by Lloyds Banking Group PLC (LSE:LLOY), both of which have ‘overweight’ ratings, with incremental share buybacks in early 2022 as additional catalysts expected.
Next in line is NatWest Group PLC (LSE:NWG), rated ‘neutral’, where the analysts expect a directed share buyback, and then Virgin Money UK PLC (LSE:VMUK), rated ‘underweight’.
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