Interactive Investor

City firm argues Lloyds Bank shares worth at least 50% more

UK bank stocks have underperformed the wider market in 2023, but this team of experts believes Lloyds is significantly undervalued. They also give a view on Barclays and NatWest.

28th November 2023 15:40

Graeme Evans from interactive investor

A bull case valuing Lloyds Banking Group (LSE:LLOY) shares at double their current level today stood out as FTSE 100 investors digested a large number of broker rating changes.

Morgan Stanley’s upside scenario for the high street lender of 85p is built on greater UK economic resilience and a return on tangible equity of 14% in the 2024 financial year. 

Assessing the year ahead for major European lenders, analysts at the City firm revealed their base case for Lloyds now stands at 64p compared with 60p previously. That’s more than 50% higher than the current market price.

The “overweight” stance reflects the advantages of a seasoned loan book and 20%-plus market share, which should make pricing pressures more manageable. 

The bear case of 40p, where interest rates fall by more than expected and Lloyds delivers a much lower return on tangible equity of 8%, is familiar territory for long-suffering investors given that shares have been stuck below 50p since April.

Today’s note helped Lloyds shares to outperform the financial sector, although in a poor session for the wider FTSE 100 index the progress was limited to 0.2p at 42.25p.

Morgan Stanley is also “overweight” on Barclays, noting that while other UK banks are more profitable, they are also considerably more expensive on a tangible book value basis.

The base case on Barclays (LSE:BARC) in today’s note is 235p, rising to 350p in an upside scenario. NatWest Group (LSE:NWG) is rated “equal weight” and 260p, with a bull case of 440p should there be a stronger earnings recovery due to a resilient economy and higher terminal rates.

Barclays and NatWest shares both struggled for momentum in a session when broker downgrades contributed to big falls for Asia-focused Burberry Group (LSE:BRBY) and Prudential (LSE:PRU).

The luxury goods group declined 53.5p to its lowest level of the year at 1,450.5p after HSBC analysts reviewed the sector’s recent earnings season.

The cut in Burberry’s target from 2,200p to 1,750p follows the group’s warning that revenue guidance for 2023/24 is unlikely to be met if weaker demand conditions continue. As well as the Burberry downgrade, HSBC softened its stance on “buy” rated Cartier business Compagnie Financiere Richemont SA Class A (SIX:CFR).

Prudential shares came under pressure after UBS trimmed its price target from 1,290p to 1,200p and counterparts at Jefferies flagged the impact of an industry-wide slowdown for bancassurance sales in Vietnam.

The insurer generates about 7% of its annual premium equivalent sales in the country, prompting the US bank to lower its big upside target from 1,950p to 1,800p

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