UK bank stocks cheap despite strong earnings outlook, says Jefferies Proactive uses images sourced from Shutterstock
UK bank shares may look undervalued despite a steady stream of earnings upgrades, with investors increasingly focused on political and geopolitical risks, according to Jefferies.
The broker, which reiterated ‘buy’ ratings stance on five domestically focused FTSE 350 banks, said medium-term earnings forecasts have been raised by around 5%, supported by higher interest rate assumptions and resilient operating performance.
UK lenders delivered returns on equity of about 16% in the first quarter, with further upside expected as higher reinvestment rates feed through to margins.
Credit growth remains solid, while impairment risks appear limited even under stress scenarios linked to elevated oil prices. Jefferies noted that official modelling suggests only a modest rise in loan losses.
However, despite these supportive fundamentals, the sector has de-rated sharply this year, with share prices down around 10%.
Analysts said the disconnect reflects investor concern over what they describe as “Scenario D” – a combination of geopolitical uncertainty linked to the Iran conflict and the risk of political change in the UK.
Potential policy shifts, including higher bank taxes, are seen as a key overhang, with uncertainty likely to persist for several months.
Jefferies said that while the outlook could remain volatile in the near term, strong capital returns and improving profitability continue to underpin the investment case for the sector.
Barclays PLC (LSE:BARC) preferred in the near term, and Lloyds Banking Group PLC (LSE:LLOY) favoured over a six- to 12-month horizon.
Target price changes were made as forecasts were tweaked, with Barclays raised 4% to 590p and Lloyds lifted to 125p, while NatWest Group PLC (LSE:NWG) trimmed 3% to 730p, OSB Group PLC (LSE:OSB) cut 10% to 700p and Paragon Banking Group PLC (LSE:PAG) lowered 6% to 1,000p.