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Lloyds and Barclays to lift capital returns in 2018, Deutsche Bank expects

Deutsche Bank repeated a 'buy' rating on Lloyds and Barclays and raised its target price on both stocks
Lloyds is expected to unveil a £500mln buyback at its full year results

Lloyds Banking Group PLC (LON:LLOY) and Barclays PLC (LON:BARC) are likely to increase capital returns in 2018 and could use share buybacks to boost earnings, according to analysts at Deutsche Bank.

Deutsche retained its ‘buy’ rating on Lloyds and Barclays, saying it prefers the large UK domestic banks to challenger banks such as CYBG PLC (LON:CYBG).

READ: Lloyds Banking Group aiming to get Berlin office ready for post-Brexit business by the year-end

On Lloyds, Deutsche raised its target price to 83p from 77p and said it expects its margins in 2018 to rise to around 287 basis points.

Margins will receive a boost from the Bank of England’s interest rate hike last November along with a full year contribution of its acquisition of credit card business MBNA, Deutsche said.

Further afield, however, it thinks margins will come under pressure in fiscal years 2019 and 2020 due to "deposit pricing reaching a floor" and a continued churn in customers on standard variable rate mortgages.

Deutsche expects underlying pre-tax profit in 2018 to fall to £8.1bn from £8.6bn last year. It sees profit falling further to £7.5bn in 2019 and then broadly unchanged in 2020.

Lloyds expected to announce £500mln buyback

Despite margin pressure and an expected drop in underlying profits, Deutsche sees stated pre-tax profits rising from £5.7bn last year to £6.14bn in 2018, £6.16bn in 2019 and £7.2bn in 2020 as the impact of claims by customers who were mis-sold payment protection insurance fades.    

"This should mean Lloyds is able to increase capital distribution in the coming years," Deutsche said.

"We think there is a good chance that Lloyds will move to announce a £500mln buyback at FY18 results (i.e executed in 1H18) along with a progressive total dividend per share."

Barclays to unveil progressive ordinary dividend

For Barclays, Deutsche raised its target price to 234p from 210p. It also expects Barclays to unveil a progressive ordinary dividend per share and a £500mln buyback in 2018.

"Though we struggle to see Barclays as a ‘dividend’ yield stock (yields have historically been lower than banks like Lloyds, and capital generation lower), buybacks would help improve earnings per share and thus earnings upgrades," it said.

It cut its dividend forecasts for 2018 to 4p from 5p. For 2019 Deutsche lowered its dividend estimate to 5p from 8p and predicts a buyback of £1bn. In 2020 the Deutsche’s dividend expectation reduced to 6p from 12p while the buyback is projected to be £1bn.

On litigation matters, Deutsche Bank expects £1.5bn in 2018-19 to cover a probe by the Department of Justice over the suspected fraudulent sale of mortgage securities and other investigations.

Adjusted pre-tax profit is forecast rise to £5.3bn in 2018 from £4.3bn in 2017 and expected to grow to £6.2bn in 2019 and £6.8bn in 2019.

Deutsche Bank lifts target price on RBS

Deutsche repeated a ‘hold’ rating on Royal Bank of Scotland Group (LON:RBS) but raised its target price to 315p from 300p, saying the bank continues to make good progress on reducing costs.

It expects a cost savings target of £7.1bn for 2018 and for the bank to exceed expectations on the £6.4bn target for 2020.

“Margin pressure does remain though, and we expect net interest income to face some headwinds in 2018 before rising again in 2019 and 2020,” Deutsche said.

Net interest income is expected to drop to £8.5bn in 2018 from £8.9bn last year but is estimated to pick up to £8.7bn in 2019 and £8.9bn in 2019.

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