LIVE MARKETS-UK banks: fundamentals too good to ignore

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UK BANKS: FUNDAMENTALS TOO GOOD TO IGNORE

Barclays is positive on UK banks, expecting strong earnings growth over the next three years, even as British growth prospects underwhelm.

Britain's economic output returned to growth in November, data showed on Thursday, but the outlook remains gloomy due to tax hikes in the budget and uncertainty over Trump's foreign policy.

Still, Barclays believes UK banks are on course to deliver among the strongest earnings growth and capital returns across European banks, at an ongoing discount.

"Despite the UK's macro malaise, the operating backdrop remains highly supportive," Barclays says.

"Alongside higher rates, deposits are growing, competition has eased, savings rates are being cut (betas 40-100%) and mix is shifting positively."

The recent sell-off in gilts also provides an opportunity for British banks, Barclays says.

"Gilts are an attractive asset class for banks with capital headroom, meaning Treasurers may accelerate their switch out of politically sensitive reserves and pick up additional NII (net interest income)," Barclays says.

Barclays rates both Lloyds and NatWest with overweight ratings and expects the pair to grow EPS by 40-50% over three years, returning 35-50% of market cap.

(Samuel Indyk)

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