Barclays analysts: Lloyds and Natwest shares are ‘too good to ignore’
Lloyds and Natwest shares are “too good to ignore”, according to analysts at Barclays, predicting bumper profit on the back of higher interest rates and low unemployment.
The analysts upgraded their profit estimates, expecting a surge in net interest income (NII) as markets have reassessed the likely speed of interest rate cuts in the coming years.
NII reflects the difference between what banks pay on deposits and earn from loans and other assets. Higher rates tend to boost interest income, as it means banks can charge more for lending.
Barclays’ forecasts suggest that Bank Rate will hit four per cent at the end of this year, falling to 3.5 per cent by the end of 2026 which is significantly higher than expectations three months ago.
“A repricing higher in UK rates expectations sees us lift our NII estimates,” Aman Rakkar and Grace Dargan wrote in a note published today.
Indeed, the rate forecasts are a little more aggressive than current market pricing, suggesting there are potential upside risks to Barclays’ forecasts.
And while interest rates might remain higher for longer, the analysts said that credit risks “remain low” for UK banks.
They argued that a drift higher in the unemployment rate to around five per cent would be a “non-event” for Lloyds and Natwest because of their prime loan books.
Broader market conditions have turned more favourable too, Rakkar and Dargan said.
“Deposits are growing, competition has eased, savings rates are being cut…and mix is shifting positively,” they wrote.
Gilt sell-off a tailwind for Natwest shares?
Finally, the recent sell-off in UK government debt could also provide a tailwind, the analysts said.
Higher yields make gilts an “attractive asset class”, which could prompt banks to pull out of “politically sensitive reserves” – deposits held at the Bank of England which earn Bank Rate – and pick up higher returns on gilts.
Thanks to these factors, Barclays think will Natwest will report pretax profit of £6.6bn in 2025 and £7.5bn in 2026, which is eight per cent and ten per cent ahead of consensus respectively.
Lloyds is projected to report underlying pretax profit of £6.5bn in 2025 and £8.0bn in 2026, a little less than 11 per cent ahead of market consensus for both years.
“UK banks (are) on course to deliver among the strongest earnings growth and capital returns across European banks, at an ongoing discount,” they concluded.
A bank tax remains a possibility, particularly given the government’s fiscal difficulties, but the analysts said it was a relatively “low” risk.