Lloyds Banking Group PLC (LSE:LLOY) has emerged as one of Deutsche Bank’s preferred names in the UK banking sector as the broker shifts its focus from rising returns to future growth potential.
In a research note, analyst Robert Noble said Lloyds, already a favourite among private investors, is well placed to benefit from a new phase in UK banking marked by stronger loan growth and selective consolidation.
“Our preference is for domestically focused Lloyds and NatWest,” Noble wrote, citing steady deposit inflows and a supportive economic backdrop.
Deutsche continues to expect sector returns on equity to expand into the “high teens” by 2027, with capital generation set to double over the same period.
However, Noble cautioned that further gains in profitability could be limited beyond that point. “We doubt returns will expand much further and the focus should turn to growth, both organic and inorganic.”
The UK is emerging from a long period of deleveraging, and loan and deposit growth has consistently outpaced expectations.
Noble said the banking market, while highly concentrated, has a long tail of smaller competitors, offering scope for larger lenders to acquire market share through bolt-on deals.
Alongside Lloyds and NatWest Group PLC (LSE:NWG), Deutsche flagged OneSavings Bank as a likely target in any wave of sector consolidation.
“Acquisitions could help the large banks grow as future upside from returns expansion becomes more challenging,” Noble added.
Despite recent volatility in global banking shares, Deutsche remains constructive on the UK sector.
It lifted its price target on Barclays from 350p to 370p, while trimming Close Brothers from 600p to 550p. Both remain rated “buy”.