Berenberg has begun coverage of Britain’s three biggest domestic lenders and assigns optimistic near- to medium-term expectations rooted in what it calls a "structural advantage" in earnings visibility despite currently depressed valuations.
The broker has given Barclays a "buy" rating with a price target of 620 pence, which implies around 21% upside from the stock's close of 511.50 pence on June 23. NatWest also receives a "buy" and is identified as the firm's top pick among the UK banks, with a 860 pence target implying roughly 31% upside from its last close of 657.20 pence. Lloyds Banking Group is rated "hold" with a 117 pence target, implying about 7% upside from its last close of 109.05 pence.
Berenberg points out that UK banks trade at approximately 7.5 times two-year forward earnings - roughly a 20% discount to the wider banking sector - and argues that this gap understates the resilience and earnings growth potential of the domestic players. The report projects that UK banks can grow earnings at about a 12% compound annual rate over the next three years compared with roughly 9% for the broader sector, and that this differential remains largely unrecognised by the market.
Drivers of earnings
Net interest income (NII) is identified as the principal driver of earnings growth for the UK banks over the coming three-year horizon. A key mechanism behind this is the banks' use of structural hedges - rolling interest rate swaps that effectively convert floating-rate deposit income into fixed-rate receipts. Berenberg estimates these hedges will account for about 50% of NII by 2028, up from roughly 20% before interest rate expectations began to rise in late 2021.
The brokerage’s analysis suggests this hedge-led conversion of deposit income into a more stable NII stream helps underpin earnings visibility and should bolster profits even without a valuation rerating.
Returns to shareholders
Even if valuations do not expand, Berenberg calculates UK banks can deliver about 15% total shareholder return per year. The firm expects average total yields - the combination of dividend payouts and share buybacks - to rise from current levels of about 7-8% to approximately 10-11% by 2028.
Bank-by-bank outlook
- Barclays - Berenberg highlights the investment banking division as having established a returns floor while still offering upside. The bank’s return on tangible equity (ROTE) is forecast to improve to 14.3% in 2027. The report says Barclays remains unjustifiably cheap versus European and US peers.
- Lloyds - Near-term profitability at Lloyds is described as "hedge-driven," with further growth contingent on diversification beyond NII and the conversion of wealth assets into higher-fee businesses. Lloyds has set aside 1.95 billion for the Financial Conduct Authority’s motor finance redress scheme. Berenberg regards Lloyds as possessing an attractive domestic franchise but sees limited scope for positive surprises at current valuations.
- NatWest - Berenberg characterises NatWest’s profitability as underappreciated, noting the shares trade at roughly a 25% discount to the European banking sector despite generating about 20% return on tangible equity. The brokerage cites the acquisition of Evelyn Partners as a contributor to recurring fee income and lists NatWest as its preferred pick among the UK banks.
Risks and balance-sheet items
Berenberg flags private credit exposures held by UK banks as a potential risk, though it views these positions - ranging between about 1% and 2.5% of banks' credit books - as manageable. The report’s macro assumptions include a slowdown in UK GDP growth to 0.8% in 2026 from 1.4% in 2025, inflation at 3.3% and unemployment peaking at 5.3%, based on the brokerage's in-house economic forecasts.
Overall, the analysis presents a constructive case for Britain's largest domestic lenders grounded in NII momentum, structural hedging and shareholder returns through distributions. At the same time, it highlights specific balance-sheet items and macro assumptions that underpin the outlook and could introduce volatility if conditions diverge from the report's base case.