Deutsche Bank has initiated coverage of Lloyds Banking Group PLC (LSE:LLOY) with a 'buy' rating and a price target of 61 pence with analysts expecting margins to stabilise in the third quarter.
The benefits of what it described as a 'structural hedge' are likely to offset the adverse effects of potential base rate cuts, it added.
In a note to clients, Deutsche also points to a reduction in the number of shares by 14% from 2023 to 2026 and an increase in the capital conversion rate from 88% to 107% as potential positive financial drivers. As a result, Lloyds' free cash flow yield is expected to reach about 16% by 2026.
Additionally, the bank's tangible net asset value (TNAV) is projected to rise by 33% to 68p by the end of 2026, it said.
While Lloyds is targeting a return on tangible equity (ROTE) greater than 15% for 2026, the German bank's forecast is slightly conservative at 13.7%.
However, an anticipated increase in the hedge's effectiveness could narrow this gap. It's important to note that the "cash ROTE," which considers the bank's deferred tax assets—the largest in the sector—will be approximately 0.90 percentage points higher than the reported ROTE.
The analysis also acknowledges potential risks from the Financial Conduct Authority's Motor Market Review. However, a "reasonable" worst-case scenario would limit the cost to about 3.5 pence per share, with a strong likelihood of lower impacts similar to those seen in past financial protections like the Payment Protection Insurance (PPI) redress schemes.
In afternoon trading the stock was changing hands for 54p - barely changed on the day.