Lloyds Banking Group PLC (LSE:LLOY) is the top UK banking pick for Jefferies, with analysts highlighting its market dominance, solid financial position, and strong earnings outlook.
The investment bank has set a price target of 85p for the stock, implying 21% upside from current levels.
Jefferies sees Lloyds’ earnings improving over the next few years, helped by a structural hedge – a tool banks use to protect themselves from fluctuating interest rates.
The bank now expects this hedge to provide an extra £2.7 billion boost to earnings between 2024 and 2026, which should push total revenue above £20 billion in 2026.
Lloyds is also on track to hit its target of a return on tangible equity (ROTE) of more than 15%, a key profitability measure that compares earnings to shareholder equity.
One major overhang for the stock has been the potential financial impact of motor commission claims, which Jefferies estimates at a maximum of £3.5 billion. However, analysts believe this scenario is unlikely and say the risk has already been factored into the share price.
Lloyds’ dividend prospects are another key attraction. Jefferies predicts payouts will be 18% above market expectations in 2026 and 29% higher in 2027, translating into potential dividend yields of 16% and 17% respectively.
That would make Lloyds the highest-yielding major UK bank based on current estimates.
A key catalyst for the stock will be a Supreme Court ruling expected this summer, which could provide further clarity on car loan mis-selling exposure. Meanwhile, Lloyds continues to trade at a discount to rival NatWest Group PLC (LSE:NWG), offering what Jefferies sees as compelling value.
In late morning trading, the shares were flat at 69.9p.