UK banking stocks are undervalued, says Shore Capital

Shore Capital has reiterated its ‘buy’ ratings on six UK-listed banking stocks, saying the market is currently pricing in a “far worse outlook”.

Analyst Gary Greenwood said that results by mainstream lenders showed “robust financial performance” with double-digit returns on tangible equity across the board and the announcement of further share buybacks.

Looking ahead, Greenwood said that banks’ outlook statements look encouraging, despite some concerns: “While political intervention in the savings market has stoked fears of peak net interest margins, we note that there remains a significant tailwind to net interest income from the repricing of structural hedges onto higher rates, which should provide ongoing support and so prevent margins from collapsing, even if interest rates eventually start to fall.”

The sector is currently trading on an average price-to-tangible net asset value ratio of just 0.7x (ranging from 0.4x to 0.9x) for a RoTE of 12.5%.

“We see average upside of 69% (range 41-110%) to our updated fair values and consequently retain ‘buy’ recommendations on all the stocks, with our current order of preference being Barclays > Virgin Money UK > Lloyds > NatWest > HSBC > Standard Chartered.”

Shore Capital has kept the following target prices for the six stocks: Barclays (145p), Virgin Money (164p), Lloyds (42p), NatWest (226p), HSBC (590p) and Standard Chartered (729p).