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UK bank stocks have performed very well this year. Believe it or not, Lloyds, Barclays (LSE: BARC), NatWest, and Santander are all up more than 25%.
Here, I’ll discuss the factors that are pushing these stocks up. Could we be heading into a golden age for the British banks?
What’s driving bank shares higher?
There are a range of factors that are driving bank shares up this year.
One is hopes of lower interest rates. Lower rates could kickstart a wave of lending and refinancing for the banks, leading to an increase in profits. They could also potentially help boost net interest income. That’s because they can reduce the cost of deposits (banks don’t have to pay such high levels of interest to customers).
Another factor is strong equity markets. Today, many banks have significant wealth management operations. Here, fees are typically generated on assets under management. When markets are high like they are now, fees are generally high too.
The market volatility seen in H1 is also helping banks that have their own trading divisions such as Barclays. When markets are volatile, clients tend to trade more to capitalise on opportunities, hedge risks, and reposition their portfolios. Barclays hasn’t reported for H1 yet, but when it does, I’d expect its trading revenues to be very strong.
Investment banking activity is also worth mentioning. This year, we’ve seen a pick-up in M&A and IPO activity and this is benefitting the banks. Going back to Barclays, it has significant operations in this area of banking. In the first quarter of 2025, investment banking revenues were up 16% year on year to £3.9bn.
Talk of less regulation could potentially be boosting the banks as well. It’s well known that Donald Trump is keen on deregulation in the US but it should be noted that here in the UK, Chancellor Rachel Reeves has been talking up less regulation too.
Finally, it’s worth pointing out that bank stocks across Europe have benefitted from their low valuations, healthy dividends, and share buybacks this year. Note that their dividends could come into focus even more if interest rates fall and the rates on savings accounts drop.
Putting this all together, the backdrop looks very constructive. It’s worth noting that many brokers expect bank shares to go higher. For example, analysts at UBS recently slapped a 415p price target on Barclays – roughly 19% above the current share price.
Worth a look today?
I’ll point out that while a bank stock like Barclays – which currently trades on a price-to-earnings (P/E) ratio of just 8.6 and offers a dividend yield of about 2.6% – could be worth considering today, there are risks to bear in mind. One big one is economic conditions. If Donald Trump’s tariffs send the global economy into a recession, I’d expect bank stocks to underperform.
I also think that from a long-term investment perspective, there could be areas of the market with more potential. Over the next decade, traditional banks are likely to face a lot of disruption from firms like Apple, Wise, and Revolut.
So, maybe FinTech (financial technology) could be a better area to look at for the long run?
