Berenberg flags 15% annual returns for UK banks, names top pick
Berenberg analyst Michael Christodoulou has initiated coverage of Britain’s three largest domestic banks, issuing buy ratings on Barclays and NatWest and a hold on Lloyds Banking Group. The brokerage cites a structural advantage in earnings visibility despite what it views as a discounted valuation relative to peers.
The firm set a price target of 620 pence for Barclays, implying roughly 21 % upside from its June 23 close of 511.50 pence. For NatWest, the target is 860 pence, representing about 31 % upside from the last close of 657.20 pence, and the broker identifies NatWest as its top pick among UK banks. Lloyds received a target of 117 pence, indicating roughly 7 % upside from its close of 109.05 pence.
Berenberg notes that UK banks trade at about 7.5 times two‑year forward earnings, a ~20 % discount to the broader sector. It expects the banks’ earnings to grow at a c12 % CAGR over the next three years, outpacing the sector’s c9 % CAGR, a growth rate it believes remains unrewarded.
Net interest income (NII) is projected to remain the dominant earnings driver, bolstered by structural hedges—rolling interest‑rate swaps that lock floating‑rate deposit income into fixed rates. The hedge is expected to account for ~50 % of NII by 2028, up from about 20 % before interest‑rate expectations rose in late 2021.
The brokerage forecasts that UK banks can deliver a total shareholder return of about 15 % per year even without a re‑rating. Average total yields are expected to rise from the current 7‑8 % to 10‑11 % by 2028, driven by higher dividends and buybacks.
On Barclays, Berenberg highlights the investment‑banking arm as having “established a floor on returns and retains room to grow,” and projects return on tangible equity (ROTE) improving to 14.3 % in 2027. The bank is described as “unjustifiably cheap relative to European and US peers.”
For Lloyds, near‑term profitability is expected to be “hedge‑driven,” with future growth dependent on diversification beyond NII and wealth‑conversion initiatives. Lloyds has provisioned £1.95 billion against the FCA’s motor‑finance redress scheme and is said to offer an attractive domestic franchise but limited upside at current valuations.
NatWest is portrayed as “underappreciated by the market,” trading at roughly a 25 % discount to the European banking sector while generating about 20 % ROTE. The acquisition of Evelyn Partners is cited as a source of recurring fee income.
Berenberg flags manageable risks from private‑credit exposures, which range from 1 % to 2.5 % of the banks’ credit books.
The report incorporates macro assumptions that UK GDP growth will slow to 0.8 % in 2026 from 1.4 % in 2025, inflation will be 3.3 %, and unemployment will peak at 5.3 %, based on Berenberg’s in‑house economists.