Lloyds among bank shares tipped following sector upgrade

Lloyds Banking Group (LSE:LLOY) is among the top picks after a City firm’s review of European banks concluded that the hotly performing sector has further room to re-rate.

Morgan Stanley’s new targets see 18% upside for euro area and UK domestic bank share prices, compared with the 3% uplift forecast for the wider European market.

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Even though shares have advanced 39% year-to-date, the bank points out that the sector is still valued at the lower end of the trading range of 8-13 times forward earnings seen outside periods of stress.

It adds that the current multiple of nine times forecast 2025 earnings represents a 41% valuation discount to the rest of the market and 20-30% to US banks.

Raising its view to Attractive, Morgan Stanley has lifted its 2026-27 earnings estimates by 2-3% and price targets by about 7%.

It said: “Post US-China de-escalation we believe risks to European growth have receded, which reduces the tail risk of rates undershooting.”

Source: TradingView. Past performance is not a guide to future performance.

The review lifts the Barclays (LSE:BARC) target to 385p, NatWest Group (LSE:NWG) to 550p, HSBC Holdings (LSE:HSBA) to 865p and Standard Chartered (LSE:STAN) to 1,168p. Lloyds Banking Group, which has been trading at a near-decade high of 78p, is now seen reaching 95p.

Morgan Stanley has retained its preference on Lloyds as one of its European top picks, alongside Commerzbank AG (XETRA:CBK), Banco Santander SA (LSE:BNC) and Societe Generale SA (EURONEXT:GLE).

The bank’s Overweight thesis on Lloyds reflects its enthusiasm for a cash-generative business with a “more seasoned book” and market share above 20%.

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It sees manageable mortgage spread erosion and higher contribution from the use of structural hedges that have underpinned industry performance at a time of falling interest rates.

The bank forecasts the dividend per share growing from 2025’s 3.17p to 4p a share in 2027, alongside £2 billion annual buybacks. Its base case assumes an interest rate of 3.25% in 2026 and a £2.1 billion total Motor Finance litigation charge.

The bull case is for Lloyds shares to reach 120p, falling to 50p in the bear case where interest rates fall to 2.5% and the bank experiences lower volume growth and higher provisions.

Across Europe, Morgan Stanley said its average price target placed the sector trading closer to 11 times earnings. This is in line with the historical average of a 30% discount to the wider market, or a 10-20% discount versus US mid- and large-cap banks.

The report said the memory of the global financial crisis, with its “never-ending” capital build journey, complex regulations and bank taxes, had made it very difficult to own European banks in the last 10-15 years.

It adds: “This continues to keep a lid on the multiple, however, with sustainable record profitability, and a more market-friendly policy direction, we now see room for re-rating closer to pre-global financial crisis levels.”

The report notes that European banks have narrowed the profitability gap to US peers, with a similar medium-term earnings outlook opening the door to some cost of equity compression.

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It also highlights a strong first-quarter results season after 90% of banks beat estimates on pre-provision profit and reported benign asset quality trends.

With better visibility on growth since then, the bank said it appears increasingly unlikely that rates will undershoot and that the long end of the forward curve should hold above 2%.

It estimates that net interest income in the euro area will bottom in the third or fourth quarter and resume growth in 2026 at 2-5% year-on-year.