Lloyds Banking Group PLC, Barclays and NatWest post-lockdown expectation ‘too

Lloyds Banking Group PLC (LON:LLOY), Barclays PLC (LON:BARC) and NatWest Group PLC (LON:NWG) shares are all undervalued, according to Credit Suisse, which has carried out research into the low returns in the UK banking sector over the past decade.

City analysts were quick to reduce estimates last year as the coronavirus crisis first swept around the world, but now consensus forecasts “appears too slow to factor in the improving outlook”, the Swiss investment banking giant said.

“We see UK domestic banks at a cyclical and even structural turning point post lockdowns,” banking analysts wrote in a note to clients, upgrading Barclays and NatWest to ‘outperform’, joining Lloyds on that rating.

Their analysis of net interest margin across the UK domestically focused trio implies the consensus is also being “too bearish”.

What’s more, research by Credit Suisse into the low returns in the UK retail and commercial banking sector indicated that signs of ‘structural improvement’ are emerging.

Retail and commercial banking has increased in importance over the past 10 years for British lenders, it was noted, but despite there being risks of disruption from payments and forex startups, the current “weak but rationalising” UK sector structure means they are more insulated than those in other countries.

While current City forecasts point to UK domestic banking returns on equity (ROE) recovering to 7% by 2023, Credit Suisse sees “benign” trends of bank asset quality allowing ROE to recover to 8.5% and returns on tangible equity (ROTE) to around 10%.

Structural cost trends for Lloyds, Barclays and NatWest are “improving faster than for other groups”, market share trends “have inflected”, and in payments “UK banks might be relatively less at risk of disruption, while the potential for productivity gains is large”.

The share price target for Lloyds was nudged up to 50p from 44p for Lloyds; for NatWest was hiked to 230p from 170p; and for Barclays was lifted to 210p from 155p.

Credit Suisse’s preferences were also rejigged for the FTSE 100’s Asia-focused lenders, HSBC PLC (LON:HSBA) was upgraded ‘neutral’ and Standard Chartered PLC (LON:STAN) was downgraded to ‘underperform’.

This is because HSBC is expected to make more progress on its return on tangible equity goals and its shares have underperformed StanChart by around 30% from its five-year high.

“We see HSBC as more sensitive to a potential increase in policy rates,” the analyst added.

The price target for HSBC was upped to 440p from 400p, while for StanChart it was cut to 447p from 460p.