Shares in most of the UK’s big banks offer plenty of upside, according to broker Shore Capital, ranging from 7% at NatWest Group PLC (LSE:NWG) up to 47% for Standard Chartered PLC.
Following the sector’s better than expected third-quarter results in recent weeks, which continued the recent trend of positive surprises on profits and capital, the broker upgraded its earnings forecasts on average by 14% for 2021, 4% for 2022 and 5% for 2023.
Virgin Money UK PLC (LSE:VMUK) was also upgraded to ‘buy’ from ‘hold’ following the recent pull-back in the shares.
ShoreCap’s current order of preference, based on upside to its updated fair values, is Standard Chartered (462p price versus 680p as ShoreCap’s fair value), then Barclays PLC (LSE:BARC) (195p to 285p), VMUK (171p to 230p), HSBC PLC (LSE:HSBA) (434p to 545p), followed by Lloyds (49p to 59p) and NatWest in last (219p to 235p).
On average the upside to fair value across the sector is 30%.
Analyst Gary Greenwood said in a note to clients that the higher Bank of England base rates are set to drive margin expansion; that there are signs that the pressure on application spreads on new mortgage lending may be abating; that clients should ignore “noise” about the new IFRS 17 accounting standard as it will have no impact on lifetime profitability, cashflow or capital and hence valuation; and that his upgrades for this year reflected the further net provision releases during the period but trimmed those for 2023 to reflect increased risk associated with higher anticipated interest rates; costs esitmates have been lifted as banks reward employees with higher pay and bonuses, along with restructuring to adapt to changing customer behaviour.
As at 30 September 2021, the mainstream UK banks had surplus capital equivalent to circa 18% of their market cap when compared to management target ratios, which he said “means they are well positioned to fund growth and absorb regulatory headwinds while also ensuring sizeable distributions can be made to shareholders”.
“We think a combination of a continued economic recovery and rising interest rates means that the holy grail of delivering sustainable double-digit RoTEs now looks more realistic than it has at any time since the financial crisis.
“We expect delivery to narrow the circa 30% discount to tangible net asset value that the sector is currently trading on.”