Lloyds Banking Group PLC (LSE:LLOY) shares sit at 76p, just above Kfeefe, Bruyette & Woods' target price of 75p, with analysts maintaining a ‘market perform’ rating.
In a recent management meeting, Lloyds presented a confident outlook, with KBW highlighting reaffirmed guidance on profitability and capital returns.
Key targets remain in place: return on tangible equity (ROTE) of around 13.5% in 2025 and above 15% in 2026, with capital generation expected to exceed 2% next year.
Net interest margins, which rose 0.06% in the first quarter, are expected by KBW to expand each quarter this year. A notable boost is anticipated in the final quarter as legacy hedges continue to benefit earnings.
KBW notes the market still underappreciates the structural shift in banking brought by a sustained 3% to 5% interest rate environment. In addition, regulatory barriers that limit new competition create a supportive backdrop for incumbents such as Lloyds.
Mortgage activity softened slightly after the first quarter due to a pull-forward of volumes, but KBW says application flows remain healthy. Margins have tightened modestly, though not enough to derail the wider trend of gradual improvement.
Bancassurance is regaining ground as a competitive strength. KBW points to a rise in mortgage customers also buying protection, now 15% compared with 7% five years ago. The combination of a more favourable regulatory environment and improved digital tools has helped unlock this growth.
The biggest uncertainty is the upcoming Supreme Court ruling on motor finance commissions. KBW expects the outcome in July and sees the current £1.2 billion provision as broadly reasonable based on a range of scenarios. Should the banks lose, additional charges are likely, although any redress scheme is expected to be time-limited.
On the structural side, Lloyds questioned the ongoing need for the ring-fencing regime, which KBW notes adds inefficiencies and costs. Any reform would take time, and no near-term changes are expected.
Finally, KBW highlights that acquisitions remain unlikely given Lloyds' already high market share in key areas. Strategy delivery and capital returns remain the primary focus.
Overall, while KBW continues to prefer NatWest on valuation, it sees Lloyds as fairly valued with solid fundamentals. Just do not expect fireworks.