Lloyds Banking Group PLC (LSE:LLOY) should unveil a step up in shareholder returns in a year or two, analysts at Jefferies reckon, for investors who "sit tight" as "the magic may soon unfold".
Taking inspiration from a 1995 novel turned into a 2006 Hollywood thriller directed by Christopher Nolan, the analysts published a note entitled "The Prestige", where they paraphrased the lines delivered in the film by old magician Michael Caine, that great magic tricks have three parts: the pledge, the turn and the prestige.
Applying this to Lloyds, the pledge came in early 2023 when the lender promised at least a 15% return on tangible equity in 2026.
"The turn was this year as its shares started to outperform. The prestige is still to come," they said. "But it could involve a move in 'cash' ROTE to 18-20% in 2027-28, on our estimates."
Building up to this moment for three years, when Lloyds lifts the silk scarf from the top hat is "a question of timing", given the autumn budget and upcoming third-quarter earnings (which "may be lacklustre").
"But as the fog lifts post motor, we see five potential reveals that could wow investors in 2026," the analysts said, which they predict could lead to the shares delivering a total shareholder return of around 50% over two years.
The first is that Lloyds is to benefit from a tailwind from its interest rates hedge, worth around £2 billion across 2027-28, potentially adding four percentage points to ROTE.
Boosting cash flow by around £450 million annually, the bank’s £4 billion deferred tax asset is forecast to unlock from 2026.
The Jefferies team see dividends per share grow roughly 25% per year from 2025 to 2027, and believes Lloyds could return more than £3 billion in share buybacks during 2026, with a move to twice-yearly buybacks seen as a structural shift.
Furthermore, they estimate that net interest margin may rise by around 10 basis points in the final quarter of 2025 as deposit rates reset, potentially delivering an early earnings beat in 2026.
The Prestige. The precise timing of these reveals is unclear. But their combination should see Lloyds' ROTE climb to c.18% by 2027-28, with DTA unwind adding a c.1pp equivalent, on our estimates. That could lead to the shares delivering TSR of c.50% over two-years, in our view