Lloyds Bank: What the City experts think

After Lloyds shares posted gains on its latest results, Graeme Evans runs through reaction in the Square Mile. 

Whatever Lloyds Banking Group says or does at the moment, it seems nothing is going to part the Brexit clouds and push its moribund share price in the direction that shareholders and analysts keep telling us the stock is worth.

Take today's impressive third quarter trading update, which revealed progress on a number of fronts and a capital cushion that continues to support the prospect of further share buy-backs and 5.5% dividend yield.

Despite the 5% beat at the underlying profits level, the share price reaction was typically modest, with the blue-chip stock up just 2%. Significantly, Lloyds is still below the 60p level, having fallen by 16% over the last year.

Unfortunately for investors, there's hardly a stock more closely linked with the UK economy and the outcome of Brexit negotiations than Lloyds. 

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Impairment charges rose 38% in the first nine months of the year, and with interest rates forecast to climb there's the very real danger the UK consumer could derail Lloyds progress.

Some reassurance may come on December 5 if the result of the Bank of England's annual stress test of the UK's biggest banks and building societies signals to Lloyds investors that payouts can be sustained.

Lloyds' strong profitability continues to drive excess capital generation and it was significant in today's results that the Lloyds tier 1 capital ratio stood at 14.6% - 10 basis points higher than market forecasts.

With Lloyds targeting 200 basis points of capital generation in 2018, analysts at Barclays think this could translate to £4.2 billion of surplus capital.

When including the dividend of £2.3 billion (equivalent to 3.21p per share), they believe this would give room for a £2 billion share buyback versus the consensus of £1 billion and the bank's own current estimate of £1.5 billion.

This analysis prompted Barclays to reiterate its overweight rating and 90p price target, with the shares "attractively valued" at 6.7x 2019 estimated earnings.

They added:

"We expect margins to be more resilient than feared as rate hikes offset the impact of tough mortgage competition."

Other favourable comment after today's third quarter results came from Jefferies, whose analysts have a 99p target price amid expectations for consensus upgrades. Deutsche Bank, which is at 74p, also noted that today's profit beat was driven by quality factors such as cost management and other income, rather than impairments.

At UBS, analyst Jason Napier described the stock as "good value" based on his price target of 80p. He added:

"We think the sustainability of dividends and buybacks are underestimated and undervalued, likely driven significantly by Brexit uncertainty."

For ordinary investors, however, there will be a feeling that they have heard all this before. Significantly, Neil Woodford's Equity Income Fund decided enough was enough last month and ditched Lloyds from his portfolio.

And it's also worth revisting the comments yesterday of Investec's banking analyst Ian Gordon in relation to the poor share price performance of Metro Bank. He said a new phenomenon was at play in markets, with significant de-ratings for stocks that are valued on expectations of strong growth.

In the case of Metro Bank, its share price weakness has come despite the bank appearing to be firing on all cylinders.