Bank of America Upgrades Lloyds, Downgrades Barclays on Shifting UK Competitive Landscape

Bank of America has upgraded Lloyds Banking Group to Buy from Neutral and downgraded Barclays to Neutral from Buy, citing a new phase of intense competition in the U.K. banking sector. In a note to clients, the investment bank said that after a benign period of margin expansion and lending growth, a tougher environment requiring difficult trade-offs is emerging.

A More Competitive Environment

According to BofA analyst Perlie Mong, the U.K. banking sector is transitioning away from the favorable conditions of the past few years. The analyst expects "more trade-offs between volumes, margins and costs as competition increases, which is already noticeable in deposits."

With major banks like Lloyds, Barclays, and NatWest all targeting 4%-5% lending growth, the competition for customer deposits is set to remain elevated, the note explained. BofA believes banks with strong deposit franchises and a proven track record of cost control are best positioned to navigate this shift.

Lloyds Praised for Deposit Strength

Lloyds was highlighted as being "best placed on both fronts," leading to its upgrade. BofA's analysis of 2023, the last period of intense deposit competition, showed that Lloyds experienced smaller outflows than its peers and successfully retained most deposit migration within its own franchise.

In contrast, Barclays saw the largest deposit outflow during that period and has not grown its deposits since, excluding acquisitions. BofA also pointed to Lloyds’ broader product offering as a competitive advantage that supports cross-selling and potential for higher fee income.

Barclays Faces Cost Headwinds

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The downgrade for Barclays stems from concerns over both its deposit franchise and the risk of "further cost slippage." BofA noted that Barclays' latest guidance implies cost growth of about 4% in 2026, a significant increase from previous guidance of broadly stable costs.

BofA's analysts called consensus expectations for flat costs in 2027 and 1% growth in 2028 "ambitious." The firm cut its earnings per share (EPS) forecasts for Barclays by 6%-8% for 2027 and 2028, reflecting these concerns.

New Price Objectives and Valuation

As part of the ratings shuffle, Bank of America adjusted its price objectives for the U.K. lenders:

• Lloyds (Buy): Price objective raised by 8% to 140p.
• Barclays (Neutral): Price objective cut by 6% to 580p.
• NatWest (Buy): Rating maintained, price objective raised by 6% to 850p.

All three banks continue to trade at a valuation discount to the broader European banking sector. On a one-year forward price-to-earnings basis, Barclays trades at 7.8x, Lloyds at 9.2x, and NatWest at 8.2x, compared with a sector average of approximately 10x, according to the note.