Lloyds Banking Group PLC (LON:LLOY) and HSBC Holdings PLC (LON:HSBC) are likely to perform better than other UK banking peers in the upcoming stress test results of 2017, according to analysts at JP Morgan.
Royal Bank of Scotland Group PLC (LON:RBS) will probably remain weaker in the Bank of England’s stress tests due to litigation risks, the broker added.
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The bank is facing rising misconduct costs and provisions in relation to the mis-selling of mortgage-backed securities in the US in the lead up to the 2008 financial crisis. It is awaiting a fine by the US Department of Justice (DoJ), which is expected to come in at about £6bn.
RBS is also still yet to put its LIBOR and foreign exchange mis-selling scandals to bed, with lawsuits ongoing.
Lloyds has also been tackling misconduct issues, including a payment protection insurance mis-selling scandal and a lawsuit brought against it by shareholders over its ill-fated takeover of HBOS in 2018.
However, JP Morgan thinks Lloyds is best positioned to manage higher capital requirements.
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It will also “meet or exceed consensus dividend per share expectations because of its under-appreciated capital generation (more than 240 basis points per year)”, allowing it to absorb a potential rise in the target common tier 1 ratio (CT1) – a key measure of capital strength - to 13.5-14%, JP Morgan said.
The broker has forecast fiscal year CT1 at 14% following a final dividend payment of 4.25p each, which includes a special dividend of 1.25p and an ordinary dividend of 3p.
“Lloyds remains a top pick and well placed to increase dividend per share further to 5p in 2018, which implies a yield of 7.5%.”
The stress tests, which examine how well banks are placed to handle difficult economic situations, will be published on 28 November.