(Bloomberg) -- Analysts are turning more positive on the UK’s underperforming bank stocks, with the boost from higher interest rates seen lingering for longer due to the way British firms hedge their fixed-income earnings.
Jefferies is the latest broker to become more bullish, double-upgrading NatWest Group Plc to buy from underperform after lead analyst coverage switched to Jonathan Pierce from the last-remaining bear on the stock, Joseph Dickerson. While central banks loosen policy, Pierce expects UK banks to reap the rewards of the ‘structural hedge’ — hundreds of billions of pounds invested in the swaps market to reduce sensitivity to interest-rate movements.
“It’s all about the hedge,” Pierce said in a note. UK domestic banks “offer unique exposure to swaps that are bigger, lower yielding and more heavily marked than the rest of Europe.”
Separately, UBS Group AG analyst Jason Napier wrote in a note on Monday that UK lenders are set to get a double boost as the structural hedge “tailwind” comes alongside an improving UK economy.
Earlier this month, Goldman Sachs Group Inc. said UK lenders were at a “turning point” — again pointing to hedge income. And Morgan Stanley said it preferred British lenders as it downgraded the European banking sector due to a broadly fading rates benefit.
Bloomberg Intelligence analysts estimate that the aggregate structural hedges of NatWest, Barclays Plc and Lloyds Banking Group Plc stood at about £680 billion ($891 billion) as of the end of the second quarter.
The change in sentiment on the stocks follows a post-pandemic period of underperformance against European peers as the UK economy was hit hard by the cost-of-living crisis and periods of political turmoil.
After the change in government was seen bringing stability in July, UBS’s Napier added that investors are now awaiting clarity on the tax outlook in the Oct. 30 budget.
“Some we talk to are concerned that the UK government may increase sector taxes,” he wrote, while adding that share prices should rise more than 5% if no such tax is announced.
(Adds estimate on size of structural hedge in sixth paragraph.)
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