UBS has maintained its ‘buy’ rating on Lloyds Banking Group PLC (LON:LLOY), saying the bank is one of its top picks in Europe after it reported a 23% rise in first-half profits.
Last Wednesday, Lloyds posted a pre-tax profit of £3.1bn for the six months to June 30, up from £2.5bn a year ago.
Net income grew 2% to £8.9bn with net interest income up 7% to £6.3bn and other income down 7% to £3.1bn. The banking net interest margin – a key measure of banks’ profitability – rose to 2.93% from 2.82% last year, driven by growth in MBNA – the credit card business Lloyds bought last year.
READ: Lloyds first-half profits rise 23% despite extra £460mln provision for PPI claims
For the year, the group expects net interest margin to be in line with the first half.
UBS raises EPS guidance, cuts target price
UBS said the company’s net interest income was in line with estimates and other operating income, lease depreciation, operating costs and impairments were all better than expected.
“Higher first-half earnings and reinforced margin guidance see our near-term earnings per share estimates upgraded by 3-5%,” UBS said.
“These higher estimates are offset by lowered peer group trading multiples in our sum-of-the-parts valuation for a target price of 80p from 87p before.
“With 27% upside and significant running dividend and buyback yield, we remain buyers."
Lloyds addresses market concerns
UBS said one of the promising areas in the results was the bank’s move to address market concerns including the sustainability of mortgage margins, structural hedge returns and capitalisation of investment costs.
“With the lion's share of the upside we see for the stock driven by valuation we think adding new facts to the debate – and keeping them updated – is an important and positive move.”
In morning trading, shares fell 0.5% to 62.2p.