Shore Capital favours international banks over domestics as bond yields rise

The broker reiterated 'buy' ratings for Barclays, HSBC and Standard Chartered, but kept 'hold' recommendations on domestic peers Lloyds and NatWest.

The recent rise in bond yields and scaling back of interest-rate cut expectations in the UK will feed through to higher retail and wholesale borrowing costs, which could be detrimental to credit demand and credit quality, the broker said. However, it said that UK banks' historical cautious approach to underwriting and focus on prime lending should mean that balance sheets are "well protected".

"The market is currently focused on the sharp rise in bond yields (which is not just a UK phenomenon) along with the strengthening of the US dollar versus most other currencies (including sterling)," Shore Capital said in a research note on Monday.

"Overall, we believe the environment currently favours those banks with international exposure relative to the domestically focused names."

For the 'buy'-rated banks, Shore Capital's fair-value estimates indicate 34% potential upside at Barclays (345p), 24% upside at HSBC (990p) and 21% upside at Standard Chartered (1,245p).

Meanwhile, just 15% potential upside is seen at Lloyds (61p) and a lesser 6% at NatWest (395p).