Lloyds Bank shares downgraded as NatWest tipped to top £4

Strongly performing NatWest Group (LSE:NWG) got the nod over Lloyds Banking Group (LSE:LLOY) today after a leading City firm backed the shares to top £4 following Friday’s forecast-beating results.

In contrast to its new NatWest target price of 413p, UBS reckons the Lloyds valuation is up with events having traded above 60p for the first time since early 2020.

The bank’s analysts stress that Lloyds is not a ‘Sell’ and that attractive shareholder distributions and scope for earnings upgrades make the lender a stock worth holding. Instead, it downgraded the shares to ‘neutral’ from ‘buy’ and trimmed its price target by a penny to 61p.

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Overall, it sees the UK domestic banking thesis as “intact and attractive” following last week’s robust half-year results.

It expects the sector to deliver annual growth in net interest income of about 5%, reflecting the economic benefits of falling interest rates for loan and transaction volumes and asset prices.

That’s attractive relative to the pan-European banking sector, which is expected to hold net interest income stable in the 2024-26 period.

Lower bad debt cover ensured the Lloyds second-quarter profit figure beat City hopes by 6%, although before provisions the profit figure was 8% below market expectations.

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UBS lifted its profit forecast for Lloyds this year by 2% but cut the following two years by 2%. It forecasts distributions equivalent to 27% of market cap over the three years to 2026, in line with the wider sector.

It added: “Unless one thinks 2026 estimates are too low or that Lloyds should trade at a larger premium (now 12% in 2025), we see shares as up with events.”

NatWest’s second-quarter results were better than consensus in all major respects, other than for costs where 2024 guidance was reiterated. Most significantly, the net interest margin of 2.10% was up five basis points on the previous quarter and nine points above consensus.

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UBS said the increase in margin was earlier and stronger than it had expected and appeared to be clean of one-offs, having been driven by the customer-facing divisions.

A large and growing hedge contribution, where banks defer the benefit of rising rates to periods when this income is expected to be more valuable, means UBS sees sustained mid-to-high single digit pre-provision profit growth in 2025-26.

It has lifted its profit estimates by 11-13% on higher revenues and lower share count, putting the shares on 7.3 times forecast 2025 earnings and returning 30% of market cap over three years. This leads to the increase in its target price from 364p to 413p.

The shares have rallied by almost 80% since early February, making them the best-performing stock in the FTSE 100 index so far this year.