An 80p price target on Lloyds Banking Group (LSE:LLOY) today boosted sentiment as a City firm revealed how the lender might kickstart shares alongside results later this month.
Jefferies believes there’s room for Lloyds to declare £500 million of share buybacks, a move breaking with the usual pattern of only distributing excess capital at full-year results.
The US bank thinks this may help “catalyse the shares” in the likely absence of near-term upgrades to earnings guidance with the third-quarter figures due on 25 October.
The widely held stock rose 1.3p to 43.4p today, part of a much-needed rebound for the sector after a summer where valuations have been blighted by pressure on industry margins and uncertainty over credit conditions heading into next year.
Ahead of the results season, Jefferies continues to see potential for a big recovery in Lloyds shares after upping its price target on the UK’s biggest mortgage lender from 77p to 80p.
This is based on an estimate for a return on tangible equity of 17.8% in 2025 compared with the City consensus at 14.4%. That’s also stronger than Lloyds’ own 2026 ambition of at least 15%, which may be updated with annual results in February.
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Jefferies has lowered its revenue and profits forecasts for 2023-25, but it continues to see expansion in the Lloyds net interest margin next year amid hopes that mortgage pricing pressures will abate towards the end of this year.
It believes that a chunk of the £3 billion of buybacks forecast to flow from 2023 trading can be fast-tracked due to current strong levels of capital generation as well as the completion of a triennial pension review.
UBS also published a note this morning highlighting that Lloyds and the rest of the UK banking sector continue to look “attractively valued” ahead of the earnings season, which begins with results from Barclays (LSE:BARC) on 24 October.
Overall, it expects the focus to be on interest margin declines and what analysts can learn about income prospects in 2024. For the time being, it sees investors preferring eurozone banks where income momentum is - for now - intact despite declining deposit volumes.
UBS notes that UK banks trade at 6.4 times forecast 2024 earnings, within which the domestic players are on 5.5 times and the two international stocks on seven times. Lloyds is its top domestic pick with a 50p target, while Standard Chartered (LSE:STAN) the top international at 900p.
The bank sees room for all the major lenders to accelerate buyback plans with the third-quarter results, but thinks the preference may be to unveil bigger repurchases at the same time as giving 2024 guidance with annual results.
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UBS pointed out that 84% of banks beat estimates on pre-provision profits in the second quarter, with 78% on revenues. This resulted in 5% earnings per share upgrades for 2023 and 3% for 2024.
However, pressure on UK deposits has increased this year as customers - particularly corporate and commercial and private banks - have paid down debt with excess cash and invested in higher-yielding assets.
UBS said: “A faster increase in interest rates to a higher level than expected has created a stronger financial incentive for both types of behaviour than it appears industry had expected.”
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