Shares in Lloyds and Natwest have been deemed "too good to ignore" by Barclays analysts, who foresee bumper profits driven by higher interest rates and low unemployment.
The analysts have revised their profit forecasts upwards, anticipating a significant increase in net interest income (NII) as the market adjusts its expectations for the pace of interest rate cuts in the future, as reported by .
NII, which measures the difference between the interest banks pay on deposits and what they earn from loans and other assets, is expected to rise with higher rates, allowing banks to charge more for lending.
According to Barclays' projections, the Bank Rate is set to reach four per cent by the end of this year and then decrease to 3.5 per cent by the end of 2026, which is notably higher than predictions from three months prior.
"A repricing higher in º£½ÇÊÓƵ rates expectations sees us lift our NII estimates," stated Aman Rakkar and Grace Dargan in a note released today. Their rate forecasts are slightly more bullish than current market pricing, indicating potential upside risks to Barclays’ projections.
Despite the prospect of sustained higher interest rates, the analysts maintain that credit risks for º£½ÇÊÓƵ banks "remain low".
They suggest that even if the unemployment rate were to rise to around five per cent, it would be a "non-event" for Lloyds and Natwest due to their prime loan books.
Rakkar and Dargan also noted that broader market conditions have become more favourable.
"Deposits are growing, competition has eased, savings rates are being cut...and mix is shifting positively," the analysts noted. They also suggested that the recent sell-off in º£½ÇÊÓƵ government debt could provide a boost for Natwest shares.
Higher yields make gilts an "attractive asset class", which could prompt banks to shift from "politically sensitive reserves" – deposits held at the Bank of England which earn Bank Rate – and opt for higher returns on gilts.
Barclays analysts predict that thanks to these factors, Natwest will report pretax profit of £6.6bn in 2025 and £7.5bn in 2026, which is eight per cent and ten per cent ahead of consensus respectively.
Lloyds is projected to report underlying pretax profit of £6.5bn in 2025 and £8.0bn in 2026, slightly less than 11 per cent ahead of market consensus for both years. "º£½ÇÊÓƵ banks (are) on course to deliver among the strongest earnings growth and capital returns across European banks, at an ongoing discount," they concluded.
The possibility of a bank tax remains, particularly given the government’s fiscal difficulties, but the analysts said it was a relatively "low" risk.
