(Alliance News) - JPMorgan on Monday warned that high street lenders, Lloyds Banking Group PLC, Barclays PLC and NatWest Group PLC, face a profit squeeze in the event of a hard-landing for the UK economy.
"With the scenario of further rate hikes well into restrictive territory now on the table, our house view is that probability of a hard landing for the UK economy is higher," Raul Sinha at JPMorgan said.
As a result, "we now expect earnings per share cuts for the UK banks to intensify with risks to capital return and asset quality".
The broker has cut its "already below consensus" earnings per share forecasts by 3% and 9% for 2024 and 2025 respectively, assuming UK interest rates peak at 5.75%.
Last Thursday, the Bank of England, surprised the City with a 50 basis point hike in interest rates to 5%. The BoE has now hiked for 13 meetings in succession.
The move followed last Wednesday's red-hot consumer price index data, which showed the UK's stubborn annual inflation rate remained at 8.7% last month, which put the half-point increase on the table.
Lenders have been criticised for failing to pass on the benefits of the rate increases to savers, with accusations of profiteering. There is growing clamour for the banks to act, and industry chiefs were hauled in to meet Chancellor Jeremy Hunt last week to address the issue, as part of wide-ranging talks regarding the sector.
JPMorgan sees a potential risk to near-term net interest income due to increased political pressure that may push for banks to pass on the full effect of interest rate changes to their interest-earning customers.
This pass-through is likely to have negative implications for deposit migration and loan books, Sinha thinks.
"Given the strong capital position and above normalized profitability of the UK banks, we also see increased political risks to earnings in the form of forbearance, pricing and windfall taxes, especially into 2024 with the election coming into view," Sinha added.
JPMorgan downgraded Lloyds to 'underweight' from 'neutral' and slashed its price target by 25% to 42 pence from 56p.
The broker prefers Barclays, which it rates 'overweight' and NatWest, rated 'neutral'. The price target for Barclays was lowered 14% to 180p from 210p and for NatWest by 19% to 260p from 320p.
Shares in Lloyds fell 0.6% to 42.09p, Barclays eased 0.7% to 144.14p but NatWest recouped early losses to close 0.7% higher at 230.90p on Monday in London.
By Jeremy Cutler, Alliance News reporter
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Lloyds (LLOY)
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