Jefferies maintained "buy" ratings across the UK domestic banking cohort even as the sector has de-rated by over 15% since January, a decline that has occurred despite earnings upgrades of a similar order of magnitude. The firm flagged political uncertainty linked to a potential shift in Labour leadership as a material drag on share prices.
The brokerage raised its medium-term earnings per share forecasts by roughly 5%. At the same time, it adjusted its terminal base rate and five-year swap rate assumptions to 3.5% from the start of 2027 - an upward revision of 25 basis points from assumptions it held in February. Jefferies noted these assumptions still sit 50-75 basis points below the current yield curve.
Target prices and ratings
Price-target changes announced by Jefferies included:
- Barclays: raised to 590p from 570p
- NatWest Group: trimmed to 730p from 750p
- OneSavings Bank: cut to 700p from 780p
- Lloyds Banking Group: maintained at 125p
- Paragon Banking Group: lowered to 1,000p from 1,060p
All five banks retain "buy" ratings under Jefferies' coverage.
Structural hedge and profitability uplift
Jefferies highlighted the structural hedge tailwind as a core element of the bullish case. In Q1 2026, domestic banks held a combined hedge notional of a3684 billion, producing a yield of 2.80% versus five-year forward rates averaging 4.49%. Jefferies estimated that the gap between hedge yield and forward rates could add roughly 40% to current profits, or approximately 7 percentage points to return on tangible equity. The brokerage reported sector return on tangible equity (ROTE) for Q1 2026 at 16%.
Credit trends and lending
Bank of England data cited in Jefferies' note showed private sector credit growth accelerating to 4.9% year-on-year through March 2026. Large non-financial corporate lending rose 11%, and three-month annualised credit growth reached 6.5%. Mortgage lending expanded 3% year-on-year and SME lending rose 3.7%, which Jefferies noted marked the end of 45 consecutive months of net repayments.
Macroeconomic stress test and loss expectations
Jefferies referenced the Bank of England's Scenario C, which assumes Brent crude peaks at $130 per barrel and remains above $100 through late 2028. Under that scenario the Bank of England model showed UK GDP growth remaining positive throughout, dipping to a low of 0.3% in Q1 2027, with unemployment peaking at 5.7%. Jefferies said this stress scenario implied only about a 10 basis point rise in sector write-off rates and would translate to a mid-single-digit impact on profits.
Political risks and investor appetite
Despite the favourable technical and credit trends, Jefferies singled out politics as the larger near-term risk to investor sentiment. The firm said: "Tail risks associated with the War combined with the potential for a significant lurch of government to the left after May elections is limiting appetite from new investors."
In the betting markets referenced in the note, Angela Rayner was assigned a 25% probability and Andy Burnham 22% as the most likely next Labour leader, while there was a 41% probability placed on the incumbent leader exiting between July and September 2026.
Jefferies also said it now views an increase in the bank surcharge as "more likely than not," estimating that a roughly 2 percentage point rise in the surcharge would cut sector profits by about 2-3%.
Distribution yields, buybacks and positioning
Jefferies' forecast distribution yields were roughly 13% in 2027 and roughly 15% in 2028. Coupled with announced buyback programmes, the brokerage expected Barclays and Lloyds each to repurchase a further a32 billion of stock within eight months. These factors underpinned Jefferies' recommendation to hold the sector through near-term volatility, with Barclays preferred on a near-term basis and Lloyds favoured on a six- to 12-month horizon.
Conclusion
Jefferies' note balances an upside case driven by hedging benefits, distribution yields and accelerating private credit with clear political and regulatory risks that are suppressing new investor demand. The brokerage's adjustments to earnings and rate assumptions, together with selective price-target moves, leave all covered domestic banks on a buy recommendation despite recent de-rating pressure.