BofA Merrill Lynch expects Lloyds Banking Group PLC (LON:LLOY) to see a £2.0bn revenue headwind as it tries to manage the trade-off between growing its mortgage volumes and sustaining its net interest margin in the face of increased competition and a lack of UK interest rate rises.
In a note to clients following results on Tuesday from Lloyds’ rival Nationwide Building Society, analysts at the US bank pointed out that at £9.6bn of gross mortgage lending in the first quarter of 2019, Nationwide's 14.5% share of the market was "well ahead" of Lloyds's at 13.1%, despite the former being much smaller.
The BofA ML analysts said: “This is no flash in the pan, with Nationwide's share of new business above its stock for three consecutive quarters.”
They added: "Future new business volumes will likely reflect pricing but Nationwide intends to stay competitive and consequently expects the current pace of margin decline to continue."
The analysts pointed out: "Lloyds is likely to continue trying to mitigate the margin pressure but its weak 1Q19 lending highlights mortgage borrowers' price sensitivity.
"We estimate that this results in a £2bn income headwind 2018-21E that is hard to fully offset with growth in other parts of the balance sheet."
BofA ML reiterated and ‘underperform’ rating on Lloyds’ shares with a target price of 55p. In late morning trading, Lloyds shares were 1% lower at 59.89p.