JPMorgan still positive on UK banks despite potential rate cuts

JPMorgan has said that dovish comments from the Bank of England this week don't alter its constructive view on UK banking stocks, even if interest rates do fall more sharply than markets are currently pricing in.

The US firm reiterated its preference for NatWest and Barclays among UK banks, keeping an 'overweight' position on both stocks. Across the sector as a whole, however, it sees "further upside" with stocks currently trading at an average price-to-earnings ratio of just six on 2026 estimates.

On Thursday, the BoE's Monetary Policy Committee maintained the Bank Rate at 5.25%, as expected, but comments from governor Andrew Bailey were viewed as dovish as he pointed to a potential easing of policy in the near future.

"It's likely that we will need to cut bank rates over the coming quarters and make monetary policy somewhat less restrictive over the forecast period, possibly more so than currently priced into market rates," Bailey said.

"This does not change our constructive view on domestic UK banks, in particular NatWest and Barclays, where net interest margin (NIM) has already inflected positively," JPMorgan said.

"In our view, the negative impact of lower short rates will largely be offset by the positive impact of rolling structural hedges in 2025/26 given the average yield of the maturing structural hedge for NatWest is just 0.5% in 2025 vs five-year swaps in the 3-4% range. Deposit pricing and mortgage competition are two key variables that will impact [net interest income] going forward and our data tracked on a weekly basis suggests that NIM trends have continued to be stable / positive so far this year."

The US bank has maintained its predictions for the bank rate to average 4.25% in 2025 and 3.75% in 2026 – slightly below current market-implied forward rates.

"We highlight that UK banks have a relatively low sensitivity to short rates (c1% of PBT [profit before tax] for -25bps cut) compared to long rates (c4% of PBT by year three for -25bps cut) driven by structural hedges, and therefore the steepness of the yield curve will be the key focus through the rate cycle," JPMorgan said.

By 1217 BST, NatWest and Barclays were both trading 0.1% higher at 318.2p and 213.6p, respectively.