Lloyds Banking Group PLC (LSE:LLOY) shares have been downgraded by UBS after second-quarter results that were "a touch soft" and do not reflect shares that are trading at a premium to other lenders.
Second-quarter profit before tax was 6% above consensus forecasts, thanks to low bad debts. However, pre-provision profit was 8% below market expectations due to 40% higher car depreciation.
The UBS analysts still expect Lloyds to grow UK domestic net interest income (NII) even as interest rates fall. However, as 2026 estimates are now in line with the City consensus, a share price target of 61p based on a sum-of-the-parts calculation is now equal to the current share price, with the stock at a 12% P/E premium to the sector after the post-results rally.
Hence, the rating was downgraded to 'neutral', though the analysts said their analysis and management guidance at Lloyds and NatWest "suggest UK banks should deliver circa 5% per annum NII growth even as the economy – already outperforming market forecasts – benefits from falling policy rates, which are good for loan and transaction volumes and asset prices.
"We think that's attractive relative to a pan-European sector, which we expect to hold NII stable in 2024-2026 overall."