This report is an updated version of the report published on 23^rd March 2022 at 10:18 AM GMT.

1. UK Banking Industry Landscape

The Banking sector in the UK is one of the major financial centers of Europe. Moreover, it is comprised of several private UK banks, international banks, and building societies. Furthermore, the industry is dominated by a few larger banks. The industry has demonstrated significant growth in online & mobile banking in recent years. Around 67% of UK adults use online banking, and 40% use mobile banking. The physical banking remained popular, and it is present in around 20,000 locations across the country. The Bank of England is the central bank, and it has been state-owned since 1946. The regulatory body for monitoring UK banking activities is Financial Conduct Authority (FCA).

The retail and commercial banks generate income by charging interest on loans, while a significant proportion of revenue is also generated by non-interest income through card fees and overdraft fees. The Biggest national private banks in the UK are HSBC, Lloyds Banking Group, NatWest, Metro Bank, and the Royal Bank of Scotland. Some of the large international banks in the UK are Bank of America, Citibank, Santander, and Triodos Bank.

Key Trends in the Banking Sector

 Risk Exposures to the Banking Sector 

• Regulatory Risk: Changes in government policy, law, and capital requirements significantly impact the banking industry. Any failure to comply with regulatory requirements may incur additional costs and penalties.
• Macro-economic Uncertainties: Volatility resulting from the current COVID-19 shambles, Brexit, and Russia-Ukraine tensions can considerably influence asset, liability, stock, and credit market pricing.
• Housing Market Boom: Any significant correction in house price would negatively impact the wealth and reduce investments in the market.
• Ukraine Tension: The mounting concern over the Russian invasion in Ukraine can continue to weigh on the equity market.

SWOT Analysis

Banking Sector Outlook

The Bank of England raised interest rates for the third consecutive meeting on 17 March 2022 to tackle record inflation in the UK. The Federal Reserve also announced a first interest rate hike of 0.25%. Moreover, the federal reserve policymakers had hinted of a 25 basis points increase in each of their next six policy meetings. The profitability of the banking sector would increase with interest rate hikes. The institutions in the banking sector, such as retail banks, commercial banks, investment banks, insurance companies, and brokerages, are going to benefit from it. The further tightening of monetary policy would depend on the medium-term inflation outlook, which could be influenced by Russia-Ukraine geopolitical tensions and subsequent threats to energy supply. Meanwhile, British inflation hit a 30-year high of around 6.2% during February 2022, which may cause a rally in the UK banking sector in expectations for a further interest rate hike.

2. Investment analysis and stocks under discussion (VMUK and PAG)

After gaining insights into the Financials sector, we would look at the business model of two banking players listed on the London Stock Exchange.

A. Virgin Money UK PLC (LON: VMUK)

(Recommendation: Buy, Potential Upside:  17.10%, Market Capitalization: GBP 2.60 billion)

Virgin Money UK PLC is an FTSE 250 listed UK based Company that provides a diverse range of banking services catering to both retail and institutional clients.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock is hovering above the 20-days exponential moving average of GBX 177.93, indicating an upside potential in the stock price. The MACD line has given a bullish crossover against the signal line.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 17.10% over the current price of GBX 182.23 (as of 23 March 2022 at 09:11 AM GMT).

B. Paragon Banking Group PLC (LON: PAG)

(Recommendation: Buy, Potential Upside: 20.52%, Market Capitalization: GBP 1.23 billion)

Paragon Banking Group PLC is the FTSE 250 listed leading UK-based specialist bank, engaged in providing lending products for landlord mortgages and business customers loans.

The company plans to release its H1FY22 results for six months to 31 March 2022 on 14 June 2022.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)            

From a technical standpoint, the stock is hovering between the upper Bollinger band and the middle Bollinger band, with the 14-days RSI of ~50.75.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 20.52% over the current price of GBX 501.68 (as of 23 March 2022 at 08:23 AM GMT).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and is subject to the factors discussed above.

Note 3: Target Price refers to a price level that the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 4:  Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

Note 5: Dividend Yield may vary as per the stock price movement.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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