Barclays upgrades RBS, says Lloyds preferred UK bank stock

"We believe the market’s likely focus on capital/asset quality means RBS no longer warrants an underweight rating, despite our expectations of continued weak earnings beyond 2020," it said. Barclays cut its price target on RBS to 130p from 190p.

Barclays said overweight-rated Lloyds, followed by OneSavings Bank, is its preferred name in the sector, given strong pre-provision earnings and well-discounted asset quality risks.

"Covid-19 potentially presents an opportunity to buy these strong franchises at low valuations," it said.

It acknowledged that Virgin Money is cheap post selloff but said relatively higher capital/asset quality risks keep it from upgrading the shares.

Barclays maintained its 'underweight’ ratings on HSBC and Standard Chartered, pointing to earnings challenges beyond 2021, "albeit both stocks may benefit from a sentiment rebound if Asia emerges from Covid-19 earlier".

"While the potential for losses is high, we think UK bank shares effectively price in a severe downturn; we estimate current valuations imply £70bn of aggregate losses for our UK banks, or 50% off domestic bank capital," Barclays said.

The bank cut its price targets "substantially" across its coverage.

"We expect a combination of painful rate cuts and weak activity to drive pre provision profits down circa 20% year-on-year. Likely strong Q1 trading income could prove to be an aberration," it said.