Lloyds Banking Group PLC (LON:LLOY) shares are unlikely to go anywhere for a while, reckon analysts at Berenberg, while those at UBS reckon the lender is a “solid play on the UK recovery”.
Fourth-quarter results from the UK’s largest lender this week were strong and were complemented by guidance that “on the face of it, suggested lower-than-expected headwinds from asset repricing and loan losses”, analyst Peter Richardson wrote in a note to clients.
Lloyds said it now expects net interest margin, the difference between interest rates for lending and borrowing, to exceed 240 basis points for the current year, which is 12bps below the 2020 level but 2 bps above prior consensus expectations.
However, while the near-term outlook has improved, Richardson said he believes the bank’s guidance overall “is consistent with greater earnings headwinds beyond 2021”.
This is because soon-to-depart boss António Horta-Osório explained that pressure on NIM during 2021 is likely to be weighted towards the second half, which the Berenberg analyst took to imply a lower exit-rate going into 2022.
“While capital return prospects have improved, we believe these headwinds will limit further upside to Lloyds’ share price,” the analyst said.
Berenberg believes Lloyds’ focus on margins has caused the bank to cede share in the UK mortgage market, which in spite of low margins offers attractive returns.
“Lloyds continues to pay the cost of this past focus, in our view, by continuing to grow less rapidly than its large UK peers during the current period of favourable lending volumes and pricing.
“Given this, and headwinds to consumer credit volumes (where Lloyds has focused), we believe the bank’s growth prospects remain inferior to peers’,” the analyst said.
Berenberg kept its ‘hold’ rating on the shares and a price target of 39p, versus Wednesday’s close price of 39.34p.
UBS analysts meanwhile, felt the 2021 guidance “substantially de-risks NIM outlook” and even implies consensus upgrades.
Viewing Lloyds as a “solid play on the UK recovery”, analyst Jason Napier saw Lloyds as having strong mortgage lending momentum and a good pipeline “which we expect to continue”.
Recent yield curve moves “are supportive of an enlarged hedge at better rates”, Napier added, while also seeing “a decent probability” that provision write-backs are seen in 2021/2, “reinforcing attractive organic dividend potential”.
With Horta-Osorio’s departure, new boss Charlie Nunn is likely to carry out a strategic review when he arrives, and UBS sees “risks of a costly reset post these numbers as modest” and see the risks around the outlook as having reduced “significantly”, bolstered by the government’s re-opening announcement this week.