British banks are roaring in 2023. Lloyds Bank(LON: LLOY) share price surged to 52.58p on Friday, 28% above its lowest level since February this year. Similarly, NatWest stock jumped to 259p, also 33% higher than the YTD low.
Lloyds, Barclays, NatWest, and HSBC are soaringHSBC (LON: HSBA) share price spiked to 628, a double-digit jump from the lowest point in 2023. The same is true Barclays, as I wrote here.
HSBC vs Lloyds vs Barclays shares
These banks have continued soaring for two main reasons. First, the Bank of England (BoE) has been quite supportive. In its meeting on Thursday, the bank decided to leave interest rates unchanged at 5.25%, its highest level in over a decade.
Most banks benefit from high-interest rates because they usually lead to more net interest income (NII). The most financial results showed that Lloyds’s net interest income jumped to more than £13.8 billion, a 5% increase.
Similarly, NatWest had a full-year profit of £4.4 billion and a net interest margin of 3.04%. HSBC, the biggest UK bank by assets, had a net interest margin of 1.66% and NII of over £10 billion.
These banks will likely continue making these numbers this year as interest rates are expected to remain higher for longer. Analysts expect the Bank of England to cut interest rates by about 75 basis points this year. In a statement, analysts at Bloomberg said:
“There was a dovish shift in the vote split and an acknowledgment that its policy stance will remain restrictive even if it eases.”
UK banks are highly undervaluedThese banks have also jumped because of the perception that they are severely undervalued compared to their American and European peers. Lloyds has a price-to-book ratio of 0.67 while NatWest and HSBC have ratios of 0.57 and 0.82, respectively.
These P/B ratios are much lower than other large banks. JPMorgan has a P/B multiple of 1.75 while Unicredit has 0.90. Goldman Sachs has a P/B ratio of 1.20. The price-to-book ratio is an important figure because it looks at its share price compared to its book value.
UK banks are also cheap, considering that, in theory, they are among the safest ones in the industry, Most of them have a CET1 ratio of over 14, meaning that their balance sheets are much safe.
Still, these companies are facing some challenges. On Thursday, we reported that Barclays is laying off hundreds of workers in its investment banking division. Lloyds is also cutting 1,600 jobs and closing some of its branches.
NatWest is culling 500 jobs while HSBC is slashing more than 500 jobs and exiting some of its markets. Therefore, investors believe that these job cuts will lead to more profits as interest rates start falling.
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