Deciding which of Lloyds Banking Group PLC (LSE:LLOY) and NatWest Group PLC (LSE:NWG) is the more profitable bank is "the ultimate question" for City philosophers, said analysts at Keefe, Bruyette and Woods.
In a substantial document devoted to answering this question -- acknowledging that greater philosophers and scientists have pondered the ultimate question of life, from Socrates's examination of wisdom and virtue, to Einstein's betterment of humanity and Deep Thought mulling of the ultimate question of life, the universe and everything -- the US broker ended up upgrading its target prices for both lenders.
Lloyds was moved to 'outperform' from 'market perform and had its price target increased to 90p from 75p, while NatWest, which was already on an 'outperform', got a revised price target of 600p, up from 570p.
The broker said NatWest delivered a higher return on tangible equity (ROTE) than Lloyds in 2024 for the first time in over 10 years and it expects this trend to continue through 2025 and 2026.
However, KBW forecasts the banks’ ROTEs will converge around 17% in 2027, with Lloyds is expected to generate slightly higher returns from 2028 onwards, supported by its greater exposure to retail banking and the potential to double leverage its insurance capital following the IFRS17 changes.
For banks, these new international accounting standards affect how insurance subsidiaries report profits, enabling better capital efficiency and potentially freeing up surplus capital.
KBW increased its estimate of normalised ROTE to 16% for both banks. It said the valuation discount previously applied to Lloyds versus NatWest is no longer justified.