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UK BANKS: HOT RUN, COLD VALUATIONS

UK bank stocks may have more than doubled over the past two years, but Berenberg reckons the story is far from over.

Analyst Michael Christodoulou believes recent gains reflect a catch-up in earnings rather than any meaningful re-rating, leaving valuations still undemanding versus European peers.

UK lenders trade at roughly 7.5 times two-year forward earnings, an about 20% discount to the sector, despite what he sees as sustainable and improving profitability.

A pillar of Berenberg's bull case is the so-called structural hedge, which smooths income across rate cycles and provides visibility on revenues. This mechanism is expected to make interest income the dominant of earnings growth.

"The structural hedge contribution provides earnings visibility as maturing hedges are reinvested at current swap rates,” Christodoulou says.

Even as the UK economy navigates a "tough patch" — with growth slowing to 0.8% this year and inflation elevated — banks look well positioned to weather the near term downturn thanks to solid balance sheets and low private-sector debt levels.

Politics, however, add a layer of uncertainty.

Berenberg sees the changing premiership and tight public finances as potential risks, with any tilt towards higher taxes on profitable sectors, including banks, still on the table. "The risk of a surcharge increase or new levies is non-trivial".

Even so, Berenberg remains constructive: “We are buyers of UK banks".

(Danilo Masoni)

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