In a note on the UK banking sector published late on Wednesday, Goldman’s analysts retained NatWest at ‘buy’ but cut their target price for the blue-chip bank to305p from 320p. Goldman also knocked Barclays PLC (LSE:BARC) to 270p from 280p and lowered Virgin Money UK PLC (LSE:VMUK) to 210p from 225p, retaining both at ‘buy’ and ‘neutral’ respectively.
“Since the beginning of 2020, UK banks have seen cumulative net inflows of retail and corporate deposits of GBP370bn, with overall domestic loans growing by only GBP100bn over the same period, mostly driven by mortgages. This has resulted in a substantial increase in excess deposits trapped in the UK ring-fences of major UK banks (from GBP50bn to GBP240bn). This in our view is the key reason for mortgage pricing (which we track bottom-up on a monthly basis) having fallen from c.200 [basis points] during 4Q20 to c.110bp as of July, on our estimates”, Goldman said.
“The decline in pricing (i) occurred faster than we expected (i.e. ahead of the expiry of stamp duty holidays) and (ii) means that our previous forecast of pricing stabilising at 120bp is no longer appropriate – we now forecast pricing to stabilise at 100bp but (iii) see risks being skewed to the downside, with mortgage pricing testing prior trough levels of around 80-90bp becoming a distinct possibility, in our view”, the analysts added.
Shares in NatWest were down 0.8% at 208.7p in lunchtime trading on Thursday, while Barclays dropped 0.4% to 178.2p and Virgin Money UK fell 2.5% to 197.5p.