Deutsche Bank nudges Lloyds target price higher

Analysts at Deutsche Bank nudged their target price for Lloyds higher but said they struggled to see the lender's risk-adjusted margins improving from here as long as interest rates remain low.

Indeed, absent a sustained and steady normalisation of interest rates, margins were expected to fall.

Furthermore, the first one or two increases in Bank Rate would have a limited impact, they argued.

"Just as banks were asked to pass on rate cuts to mortgages in 2016 we expect similar treatment for savers when rates start rising, and LBG has a lower mix of current accounts than peers," analyst David Lock said.

Loan loss provisions were also at record lows, implying 'downside'.

The 'bull case' for Lloyds, on the other hand, was that if its target for RoTE could be achieved - which implied Bank Rate at between 0.75% to 1.0% - that would equate to roughly 250 basis points of additional capital generation each year and a 8.0% dividend yield on a 75.0% payout, or 11.0% on 100.0%.

From a valuation perspective, a cash dividend yield between 6% and 7% was attractive for investors, Lock said, and better than HSBC and other UK banks.

However, changing hands on 1.2 times tangible net asset value and a 2018 price-to-earnings multiple of 10.2, "it is not especially cheap," so 'Hold', Lock said.

The analyst did raise his target price from 68.0p to 70.0p.