Analyst Rating Revision

Bank of America (BofA) analyst Perlie Mong revised its coverage of the three major U.K. banks. Lloyds Banking Group was upgraded from Neutral to Buy, and its price objective was increased by 8% to 140 pence. Barclays PLC was downgraded from Buy to Neutral, with its price target cut by 6% to 580 pence; the downgrade also incorporates earnings‑per‑share (EPS) forecasts reduced by 6‑8% for 2027 and 2028. NatWest Group retained its Buy rating, and its price objective was raised by 6% to 850 pence.

Market Context and Outlook

Mong noted that U.K. banks have benefited from a benign environment over the past two to three years, driven by continuous margin expansion, stronger‑than‑expected lending growth, and moderate cost pressures. Going forward, he expects “more trade‑offs between volumes, margins and costs as competition increases, which is already noticeable in deposits.” All three banks are targeting 4‑5% loan‑growth rates, with loan‑to‑deposit ratios in the 90s %. Deposit competition is projected to stay elevated as each bank seeks to expand its mass‑affluent customer base.

Deposit Competition and Cost Pressures

Reviewing 2023 deposit‑competition data—the last period of intense sectoral rivalry—Lloyds recorded the smallest outflows among peers and retained most deposit migration within its own franchise. Barclays experienced the largest outflows and has not grown deposits (excluding acquisitions) since that period. Lloyds’ broader product suite was highlighted as a competitive advantage, supporting greater cross‑selling and fee‑income potential.

Mong flagged a risk of further cost slippage at Barclays. The bank’s latest guidance implies cost growth of about 4% in 2026 (excluding acquisitions), up from prior guidance of broadly stable costs. Consensus forecasts anticipate flat costs in 2027 and roughly 1% growth in 2028, which Mong described as “ambitious.” While Barclays’ management argues that incremental spending reflects high‑return investment, Mong observed that peers—particularly NatWest—have a better track record of productivity improvements.

Valuation Metrics

BofA rolled forward its valuation horizon to 2028. On a one‑year forward price‑to‑earnings (P/E) basis, Barclays trades at 7.8×, Lloyds at 9.2×, and NatWest at 8.2×, compared with a sector average of roughly 10×. Barclays’ discount of about 26% to the sector is noted as not unusual relative to its historical average discount of 20%.

Key Figures Summary

  • Lloyds: Upgrade to Buy, price target 140 p, 8% increase.
  • Barclays: Downgrade to Neutral, price target 580 p, 6% decrease; EPS cuts 6‑8% for 2027‑28; cost growth guidance 4% for 2026.
  • NatWest: Buy retained, price target 850 p, 6% increase.
  • All banks target 4‑5% loan growth; loan‑to‑deposit ratios in the 90s %.
  • Forward P/E: Barclays 7.8×, Lloyds 9.2×, NatWest 8.2×; sector average ≈10×.