After another year of frustration for Lloyds and other banks, one City expert thinks the sector has been oversold. Here’s what they think the big bank shares are worth.
The “buy” case for Lloyds Banking Group (LSE:LLOY) shares and other UK lenders continues to be made after the sector’s latest forecast-beating results failed to alter stock market fortunes.
UBS analyst Jason Napier argues the banking industry has outperformed for years by a significant margin and is clearly “not as much of a basket case” as valuations imply.
He has “buy” recommendations on all the major UK lenders, seeing 51% upside for Barclays (LSE:BARC) shares to 240p, 18% to 55p for Lloyds and 23% to 330p for NatWest Group (LSE:NWG). The highest-yielding stock among the blue-chip players is HSBC (LSE:HSBA) at 7.1%.
The UK banks trade on 5.6 times 2024 forecast earnings, cheaper than European peers who themselves are on a 50% discount to the Stoxx 600 with a multiple of 6.4 times.
Napier believes this gulf between UK and European valuations can only be partially justified by the “idiosyncratic risks” around some margin compression as Covid-era mortgages come to the end of initial fix periods.
Lloyds is Napier’s preferred domestic pick, with Standard Chartered (LSE:STAN) the favoured UK-listed international operator based on an 805p target price.
Despite the support of UBS and other analysts, Lloyds shareholders have endured another year of frustration as the widely held stock is broadly unchanged so far in 2023. That’s despite further margin-enhancing interest rate rises, robust first quarter results and the promise of more shareholder payouts.
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Napier thinks investors have become too fixated on the near-term peak for interest rates and that bank income is much more defensive than appreciated by the market.
In a note published before today’s higher-than-expected UK inflation reading, Napier said: “Generalist investors appear particularly cautious on the potential for a bank sector re-rating in the face of peak rates. That's not an unreasonable thought process: it's hard to re-rate even as top line momentum stalls.
“There are also concerns that macro risks will lead to lower loan growth, higher bad debts and rate cuts.”
However, Napier regards the sector as oversold on imported concerns around liquidity and said that worries about loan losses have persisted even as macroeconomic measures have outperformed.
This has been backed up by 86% of European banks producing better pre-provision profits than the market consensus in the first quarter of the year.
Napier is ahead of consensus for 2023 net interest income on about two-thirds of his coverage, believing that the market is pricing extreme uncertainty around earnings. He added: “We expect further upgrades to 2023 earnings and solid capital returns via dividends and buybacks.”
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