Analysts at HSBC sounded a more positive note on RBS and Barclays on Friday, but not Lloyds, following the 15-20% decline in their share prices over the past three months, on the back of concerns around geopolitics (and Brexit).
Nevertheless, while valuations for the three lenders had improved, with all of them now looking simply 'oversold', their 'operating story' had not, they said.
They were particularly more upbeat on RBS, raising their target price on its stock from 280p to 290p, while upgrading their recommendation from 'hold' to 'buy'.
Barring a 'hard Brexit', or other significant 'macro issues', RBS should see “modest” revenue growth, HSBC said.
More importantly however, the shares had underperformed those of its peers as hedge funds looked to turn a quick profit from the government's sale on 5 June of a 7.7% stake in the lender.
With scant liquidity in the market, their price took a hit as the hedge funds sold, with institutional investors having remained on the sidelines during the placing for a “variety of reasons”.
But another placing by the government was deemed unlikely in the near-term and RBS should be able to begin buying stock in early 2019, thus reducing the overhang in its shares, HSBC said.
For Lloyd's on the other hand, HSBC trimmed its target price from 72p to 68p, arguing that the lender was 'overearning' – more so than other UK lenders even – due to its residual book of unrealised gains on Gilts and its legacy mortgage book.
As well, with a 21% share of the mortgage market and a quarter of that for credit cards, it was in a weak position within an increasingly fragmented market place, the analysts said.
Lastly, HSBC kept its 'buy' on Barclays, lifting its target price from 260p to 270p and selecting it as its preferred UK bank name, explaining that they wree increasingly confident that it would earn close to a cost-of-equity ROTE in 2019, with room for upside.
Nonetheless, for all three lenders HSBC said: “Overall then we don't see a particularly propitious market backdrop for the UK domestic banks.
“We're expecting subdued volumes and a margin outlook with risks to the downside. And while there might be meaningful longer term benefits to come from digitisation or even Open Banking, for the foreseeable future this is likely to be offset by the massive investment cost required to both deliver that digitisation and update core banking systems.”