Lloyds Banking Group plc’s (LON:LLOY) shares are under pressure today after Berenberg cut its rating on the stock to ‘sell’ from ‘hold’ and reiterated a 55p target price, saying it believes the lender is overvalued.
Shares fell 2.31% to 66.48p in morning trading.
Berenberg believes Lloyds is highly exposed to cyclical loan losses in the UK amid the risks of Brexit and rising interest rates by the Bank of England (BoE).
At the full year results last month, Lloyds chief executive Antonio Horta-Osorio said the bank's future underlying performance is tied to UK economic growth.
While the lender’s net interest margin has risen about 80 basis points to 2.70% over the past four years, Berenberg noted that revenues have fallen 5% as its interest-earning assets have fallen by 20%.
“Excluding the acquisition on MBNA’s UK card book, we expect volumes to fall by 0.5% annually and for margins to remain flat,” Berenberg said.
“As a result, our revenue expectations are around 5% below consensus.”
The BoE's proposals to increase mortgage risk weights create a 100bp headwind for the capital common equity tier 1 (CET1) ratio, the broker added.
The inclusion of domestic systemic buffers into the central banks’ stress tests could also lead to a 100bp rise in the CET1 target.
Berenberg said its dividend per share expectations are 15-20% below consensus and its earnings per share (EPS) forecast its 15% below market estimates.
“Despite an attractive dividend yield, we believe Lloyds is overvalued, trading at 1.3x tangible book value and more than 12x EPS, particularly given skewed risks to earnings.”