Interactive Investor

Lloyds Bank shares tipped to rally back to 2015 prices

6th September 2022 15:51

by Graeme Evans from interactive investor

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Investors wanting to play the new Liz Truss government’s pro-growth theme should look no further than Lloyds Banking Group, argues this City expert.

Lloyds Bank 600

A predicted 90% upside for Lloyds Banking Group (LSE:LLOY) shares to a level not seen since August 2015 and before the Brexit referendum countered recent pessimism towards the UK’s biggest mortgage lender today.

The “buy” recommendation and new target price of 83p from City analysts at Jefferies is based on expectations that Lloyds will be the bank to play the “pro-growth UK agenda” under new prime minister Liz Truss.

The City firm expects a “steady earnings surprise” from Lloyds as it catches up with its domestic peer NatWest (LSE:NWG) after a year of significant share price underperformance.

Today’s bullish note, which represents an upgrade from a previous 78p target, comes with shares trapped in a range of 40p to 50p as recession fears more than outweigh improved capital returns and the potential of margin-enhancing interest rates.

The widely held stock today rallied 2p to 45.5p as speculation of an energy bill freeze boosted interest in all UK assets, including those in the retail and house building sectors.

The rise for Lloyds and other lenders including Virgin Money (LSE:VMUK) reflected the possibility that the Bank of England will have to go harder on interest rates to get inflation back towards the 2% target. There’s also the boost from an improved outlook for impairments if corporate and individual borrowers are given more support on bills.

Jefferies expects to see a “pro-growth agenda and cost of living bazooka” from Truss, in addition to the lower taxes and supply side reforms suggested at the weekend by Kwasi Kwarteng, who is set to be the next chancellor.

The bank said today: “Lloyds is our preferred play given its trailing performance to NatWest, the fundamentals and correlations to UK macro factors.”

It points out that Lloyds shares are down 6% year-to-date, whereas NatWest has been 13% higher on the back of its chunky dividend and share buyback announcements and greater interest rate sensitivity.

Jefferies believes Lloyds can catch up based on likely earnings revisions, as well as through the consistency of its returns and the potential to return £6.6 billion or 21% of market capitalisation to shareholders through to 2024.

The bank’s earnings estimates are 20% above the City’s consensus, with today’s note including small upgrades to net interest income assumption for 2023 and 2024.

Jefferies said that non-interest income has performed better than anticipated, notably through a better retail banking performance, and that trends on costs offered encouragement in the second quarter results.

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