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Investing.com -- JP Morgan sees UK domestic banks demonstrating consistent earnings generation and momentum in EPS upgrades despite declining interest rates, with strong capital positions remaining underappreciated by the market.
UK banks currently trade at 7.1x PE (versus European sector average of 8.6x) and 1.1x PTNAV for 2027 estimates, despite JP Morgan forecasting high-teens return on tangible equity (ROTE) as sustainable in the current rate environment.
The bank expects Natwest to achieve 18.8% ROTE, Lloyds 17.7% ROTE by 2027, and believes concerns about an inflection in structural hedge earnings are premature. JP Morgan also views potential tax increases in the upcoming UK Budget as largely priced in, allowing investors to re-engage with the sector.
Distribution outlook remains solid with total yields averaging around 8% for 2025, growing to 11% by 2027. All three domestic banks will refresh targets next year, likely focusing on sustainability of returns and cost efficiencies.
JP Morgan continues to favor UK exposure within European banks, expecting the current elevated cost of equity at 14% to decline toward the European average of 12%. NatWest Group PLC (LON:NWG) and Barclays PLC (LON:BARC) remain European Top Picks following guidance upgrades, while Lloyds Banking Group PLC (LON:LLOY) also offers attractive re-rating potential.
The bank sees regulatory easing as a catalyst for lower cost of equity, with the UK government focused on improving international competitiveness through reforms. JP Morgan awaits a review of the capital framework from the Bank of England in early December and a review of ring-fencing in early 2026.
JP Morgan has upgraded NatWest Group PLC’s (LON:NWG) price target to 730p from 700p, maintains Barclays’ target at 500p, and Lloyds at 100p.