Berenberg stays at 'hold' on Lloyds Banking

Berenberg said that while Lloyds' recent third-quarter results "did not differ materially from consensus", it thinks the near-term outlook for net interest income remains constrained.

The broker also noted that retail savings balances now account for 64.6% of Lloyds' retail deposits, a roughly 130 basis point increase versus Q2 2023. The effect of this change in mix, alongside the increasing cost of these deposits, has "more than offset benefits" from higher interest rates since the final quarter of 2022. Given expectations for little or no further Bank of England interest rate hikes, Berenberg believes that rates offered on new savings will be unlikely to "increase materially".

Looking ahead, the German broker reckons dynamics in the deposit market will likely create a diminishing headwind and be complemented by greater support from the reinvestment of hedge assets and more favourable mortgage pricing and volumes.

"Lloyds' 14.6% common equity tier 1 ratio is circa 110 basis points above its target. Given this, and Lloyds' strong capital generation, we forecast an average total annual yield (dividends plus buybacks) of circa 13% during the next three years," said Berenberg.

"Trading on 0.8x total book value versus a circa 15% return on tangible equity, Lloyds is not expensive. Our 58.0p price target for Lloyds values the bank on circa 1.2x total book value. We, nevertheless, retain our preference for Barclays ('buy') and NatWest ('buy') given these banks' superior valuation support, yield and growth."

Reporting by Iain Gilbert at Sharecast.com