UBS has lifted price targets on several UK lenders ahead of a busy third-quarter results season, arguing that attractive valuations, accelerating loan growth and structural hedge tailwinds make the sector compelling despite lingering concerns over tax and sovereign yields.
The Swiss bank, which remains broadly overweight UK domestic banks, said the sector is trading at 7.7 times its 2027 earnings estimate, a 19% discount to the wider European banking sector and a 34% discount to the FTSE 100.
UBS said investor sentiment has been weighed down by worries over deposit spread compression, the prospect of higher banking taxes in Chancellor John Healey's budget on 28 October, and broader uncertainty around bond yields, the Middle East and artificial intelligence valuations.
However, the broker argued that corporate loan growth running at around 10% year on year was faster than most investors expected, driven by the unwinding of post-financial crisis deleveraging rather than cheap debt or a benign economic backdrop.
On tax, UBS modelled a scenario in which the current 3% banking surcharge is doubled, concluding the impact on profits would be around 2% on average and 3-4% for the more domestically focused lenders, roughly requiring 2-3 basis points of wider loan or deposit spreads to compensate.
The broker said it would not be surprised to see investors buy the dip on any announcement of higher bank taxes, given the sector's discount valuation.
Barclays remains UBS's top domestic pick, with its price target cut 2% to 590 pence from 600 pence on slightly lower earnings estimates but a buy rating maintained, with the bank seen compounding earnings at 18% per year through to 2028.
Lloyds Banking Group's target rises to 135 pence from 133 pence, while NatWest's moves up 3% to 835 pence from 810 pence, both rated buy.
HSBC and Standard Chartered are rated neutral, with UBS cutting both price targets on lower peer group multiples, though it noted tactical interest in both given their pullback and strong Asian wealth momentum.
