Goldman cuts Lloyds to 'sell' on competition, low rates

GS pointed out that Lloyds saw a market decline in new business share in the first half of this year, which led to a 3% annualised decline in mortgage balances.

Goldman said it sees two further sources of incremental competition from here.

“(1) HSBC will continue to strengthen its intermediary distribution as it seeks to deploy significant excess deposits into UK mortgages; (2) the Term Funding Scheme will provide the ‘challengers’ with a very low-cost funding source.

“We view Lloyds’ margin maintenance strategy as optimal. Nevertheless, we believe increased competition will have a significant impact on profitability, and downgrade our rating.”

GS cut its earnings per share estimate for 2016-18 by 0%-10%, mostly to reflect a 10 basis point cut to the base rate in November and a continued drop in mortgage balances.

Goldman said management is pursing the right strategy by choosing to protect margins over market share or even stock, as a substantial pricing cut would have an even more pronounced impact on earnings.

“A key question for the group going forward will be by how long it can delay significantly lowering its mortgage pricing. Ultimately, we believe it will have to mark to market its pricing at some point. This is when the P&L is likely to take a further hit.”