RBC Capital downgrades Lloyds after shares hit price target

RBC said that trading at around 1x 1 year-forward TBV, Lloyds now looks expensive relative to peers, and it believes that the re-rating story will be much tougher from here.

RBC said it was updating its estimates after the bank’s second-quarter results this week and maintaining the price target.

"We continue to feel that LLOY is a well-managed bank with favourable strategic positioning, but we have run out of runway in valuation terms," it said.

"We did not downgrade to underperform due to: (i) the strength of the bank's deposit franchise, (ii) the certainty of momentum provided by the structural hedge, and (iii) a relatively attractive total return yield."

RBC sees asymmetric risk to the downside in the event of a bad outcome from the Financial Conduct Authority’s review of motor finance.

"Pre-results consensus included circa £1.1bn in remediation charges for the issue versus our conservative base case of circa £2.5bn," it noted. "We expect that a soft outcome could represent a positive catalyst, but the reward is not worth the risk, in our view. There is also a high probability that September's announcement yields no clear outcome, with the can being kicked down the road, extending the period of uncertainty regarding this issue."