Lloyds Banking Group (LLOY)


Is sentiment toward Lloyds Bank really cooling?

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Is sentiment toward Lloyds Bank really cooling?

Broker Investec has launched a vigorous defence of the investment case for Lloyds Banking Group (LLOY), after it said clients had noticed some sellside analysts becoming more bearish on the popular high-street lender.

An apparent deterioration in sentiment towards Lloyds has caused the share price to weaken by 9% since it reached a 12-month high of 73.51p late May. It's currently trading below 67p despite a lack of recent negative catalysts.

Investec analyst Ian Gordon says the bear case has been gaining traction due to expectations that net interest margin (NIM) will get squeezed and impairments will spike. However, he counters, "this is simply not showing up in [his peers'] forecasts".

Gordon urges investors to "focus on the raw data" like company-compiled consensus suggesting NIM. This key measure of bank profitability, which shows the difference between what they pay to get deposits and what they charge to lend money, has improved 19 basis points since September 2016 to 2.82%.

Further, consensus for 2017 impairments is down from £1.76 billion to £1.02 billion. Gordon's estimates look better for Lloyds, with NIM at 2.84% and 2017 impairments below £1 billion.

NIM is proving resilient due to improving mortgage pricing through May and June and term funding scheme - which provides banks with four-year funding at base rate - drawings that have now passed through £75 billion.

Impairments are low because of interest rates running at 300-year lows, unemployment at a 42-year low and a product mix now heavily skewed towards low-risk assets.

The dividend remains attractive and is set to jump from 3.05p in 2016 to 4.5p in 2017. By 2019, a 5.5p dividend per share gives the stock a prospective yield of 8.2%. "On 1.2 times 2017e tangible net asset value, we reaffirm our 'buy' recommendation and unchanged 75p target price," says Gordon.

Interestingly, though, many fellow brokers are even more positive on Lloyds than Investec. We recently heard the case from UBS analyst Jason Napier.

Lloyds is one of UBS's most-favoured FTSE 100 (UKX) stocks, with Napier noting it's "well-positioned for a downturn" in the UK economy due to good capital levels, a defensive loan portfolio and high levels of liquidity. He expects a re-rating soon, with a target price of 85p.

Second-quarter results, due on 27 July, could certainly be the catalyst. Ahead of that announcement, Deutsche Bank's David Lock has set out his expectations, with NIM in line with consensus at 2.82%. That includes the benefit from May's acquisition of MBNA, with the first month's earnings from the credit card provider coming through.

Lock is, again, still positive on the firm at 79p, seeing an underlying return on tangible equity of 13% in 2018.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise.The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.