Lloyds Banking Group PLC (LON:LLOY) is the most preferred bank share in the UK for analysts at Barclays, with “several reasons” why investors should stick with the sector despite its rally in recent months.
The banking sector has performed well since last autumn, helped by Britain’s vaccine roll-out and investors getting more comfortable about Brexit effects.
Investors who bought around last year’s lows and who are now thinking about moving on may miss out, Barclays said in a note to clients on Tuesday, as analysts think consensus earnings per share (EPS) expectations “could continue to improve and capital return could be sustainably better than anticipated”.
The Bank of England’s Prudential Regulation Authority is soon due to give an update on whether banks can resume dividend payments.
The market is broadly expecting dividend restrictions to be eased but the Barclays analysts think investors “may be focusing too much on H2 2022 payouts. We think the sustainable yield is more relevant, which is a function of initial capital levels and organic capital generation.”
Lloyds, however, is preferred overall as analysts see the strongest earnings outlook and see the biggest upside to consensus earnings, with Barclays current adjusted EPS estimates 20% and 15% ahead of consensus for 2022 and 2023.
“Most importantly we are positive on revenues, seeing a resilient NIM [net interest margin] outlook alongside stronger loan growth, given Lloyds’ faster growing consumer credit book,” analyst Aman Rakkar wrote.
“This may challenge Lloyds’ perception as ‘ex-growth’, although could also reignite the debate on its target CET1 ratio (rising to 14% from current 13.5%).”
Rakkar and his colleagues expect strong capital generation by Lloyds to translate into attractive capital return yields.
New chief executive Charline Nunn “raises strategic uncertainty but could also see action taken to drive non-interest income and costs” to lift the lender’s structural return on tangible equity.
Least preferred lenders are European names Commerzbank, UBS and ING.