Lloyds Bank upgrades and Standard Chartered fan club grows

High street banks are in the middle of their results reporting season, and there are plenty of positives for investors to be happy about.

Banking sector valuations moved in the right direction today after Lloyds Banking Group (LSE:LLOY) got a flurry of broker upgrades and Standard Chartered (LSE:STAN) results smashed City expectations.

Lloyds lifted 0.65p to 46.42p as yesterday’s better-than-forecast quarterly figures prompted  analysts at Deutsche Bank and UBS to raise price targets by 4p to 67p and 3p to 61p respectively.

The biggest upgrade came from Bank of America, which went from 45p to 57p after raising outer year earnings per share forecasts by as much as 34%. The US bank added: “Stronger profitability generates more capital, allowing Lloyds to return £8.6 billion of capital to shareholders over the next three years.”

Long-suffering investors are used to setbacks and will no doubt “believe it when they see it”, but there’s no hiding the current boost to the Lloyds outlook as interest rates rise. Another hike in the Bank of England base rate is expected next week.

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Meanwhile, this week’s reassurance from Britain’s biggest lender that it can ride out the cost of living storm has bolstered sentiment after a £177 million impairment charge revealed in the first quarter remained small relative to its lending assets.

Reviewing his price target this morning, Deutsche Bank’s Robert Noble wrote: “Lloyds results show the benefit of rising rates outweighs compressing UK  mortgage spreads.

“Lloyds upgraded near-term guidance and we expect medium term guidance to be upgraded with half-year results as rate induced profitability persists.”

Noble increased his net interest margin forecast and now sees an 11.1% return on tangible equity in 2022, rising to 12.4% in 2024 following upgraded guidance from Lloyds yesterday.

UBS’s Jason Napier also pointed out that the net interest margin is rising faster than the market had forecast, even though there’s only been a modest rise in rates so far.

He added that the company’s guidance for a net interest margin of at least 2.7% in 2022  suggested a £200 million upgrade to consensus net interest income at 8% growth. Napier said yesterday: “We expect a continued focus on mortgage market pricing and on the outlook for credit losses but expect upgrades to consensus pre-provision profits.”

UBS’s UK banking analyst is also a fan of Standard Chartered after he made the emerging markets lender his new top international pick, ahead of HSBC.

This follows a storming first quarter performance in which underlying profits of $1.5 billion (£1.2 billion) came in 44% ahead of City consensus. Income growth for 2022 is now expected by the bank to slightly exceed the previously guided 5-7% range.

In February, Standard forecast annual income growth of 8-10% between 2022 and 2024, based on 5-7% from underlying business growth and a further 3% from rising interest rates.

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Shares today jumped 73.7p to 553.4p, their highest level since early March, but UBS’s Napier believes the stock has the potential to be at 690p. While mindful of the risks to GDP growth and credit quality from Covid and geopolitical conditions, he believes the bank is well-positioned to re-rate as it delivers profit and return on tangible equity improvement.

On the second metric, chief executive Bill Winters said Standard was on track to deliver a 10% return by 2024, if not earlier. The figure rose to 6% in 2021, up from 3% in 2020 after the pandemic derailed the company’s earlier plans to reach the 10% target.

Analysts at Bank of America today raised their 2022 earnings per share forecast by 10%, with increases of 7% and 6% for the following two years.

They said: “On our new forecasts, Standard Chartered trades at a striking four times 2024 forecast earnings. Even on 12 month forward earnings, the stock is at a 30 year low.”