In spite of what Citi believes will be another tough year for the UK economy, the US investment bank has reiterated its overweight position on UK banks.
2012 will be another difficult year, the broker says, with "continued emphasis on balance sheet repair after the surge in private and public debt of recent years...The drag from simultaneous de-leveraging by both public and private sectors is without precedent in recent decades, and has much further to go, in our view."
Citi expects UK gross domestic product to increase by just 0.2% this year and 1% in 2013 (down from previous forecasts of 0.5% and 1.2%, respectively).
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"Private sector de-leveraging is clearly to the detriment of bank earnings, and subsequently bank share prices. However, share prices usually move in anticipation of the event and then trough long before the de-leveraging process concludes."
Domestic UK bank share prices are up between 31-43% in the year-to-date, compared with a mere 13-14% rise for international banks. The broker argues that at the recent trough in UK bank share prices, the market was discounting "something markedly worse than a 'normal' UK recession".
"Combined with cheap bank valuations, and low stock ownership, we therefore do not believe that the UK banks will re-trace their recent lows," the broker said.
Citi's preferred bank is Barclays, for which is raises the target from 245p to 275p. It also keeps buy ratings on Lloyds, HSBC and Standard Chartered. The latter however is take off the 'most preferred' as the broker sees limited room for positive surprise around the full-year results.
Additionally, the US bank has downgraded Royal Bank of Scotland from buy to neutral but assures that this is mainly due to its lofty valuation, having rallied 43% in the year-to-date, better than its peers. "We believe that RBS shares will now pause for breath."
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