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Investing.com - UBS has upgraded its outlook on several U.K. banks, highlighting Barclays (LON:BARC) and NatWest (LON:NWG) as top large-cap domestic picks in a comprehensive sector review.
The investment bank maintained "Buy" ratings on Barclays, citing its "extremely dislocated valuation" despite strong earnings growth potential, and NatWest, noting its premium return on tangible equity and attractive free cash flow.
UBS also recommended Standard Chartered (LON:STAN), upgrading its price target by approximately 20%.
U.K. domestic banks face slightly softer mortgage spreads and volumes alongside a tougher deposit market in the second quarter, according to UBS analysis of system data.
However, the firm expects rate hedges to more than offset these pressures, particularly for NatWest given some seasonality in Lloyds Banking Group (LON:LLOY)’s hedge and its more retail-focused mix.
For international banks like HSBC (LON:HSBA) and Standard Chartered, UBS noted the sharp decline in Hong Kong Interbank Offered Rate (HIBOR) in the second quarter could cost HSBC $2 billion and Standard Chartered $200-250 million in net interest income if sustained through year-end.
HSBC could recover approximately $1 billion from Sterling strength, as one-third of its loans are UK-based.
The U.K. bank second-quarter earnings season begins with Lloyds on July 24 and concludes with Standard Chartered on July 31.
UBS highlights several key themes, including capital deployment choices between buybacks and acquisitions, product pressures in U.K. loans and deposits, and hedge-driven tailwinds that make UK banking “the best NII growth in Europe in 2025 and 2026.