In an investor note on UK banks, Morgan Stanley said Lloyds remains its top pick as it thinks the valuation is “compelling”.
It left its recommendation at ‘overweight’ but lowered its target price on the shares to 70p from 78p due to a 2% drop in its forecasts for earnings in 2020 and 2021.
Morgan Stanley added that it continues to expect a £2.5bn share buyback to be announced at year end, driving a total yield on the stock of 12%.
The investment bank said the biggest uncertainty is asset quality but its numbers already account for a significant slowdown.
RBS share buyback to be delayed
On Royal Bank of Scotland Group PLC (LON:RBS), Morgan Stanley left its ‘equal-weight’ rating unchanged but cut its target price to 270p from 300p as it reduced its earnings forecasts by 4% for 2019, 7% for 2020 and 6% for 2021.
Morgan Stanley thinks the state-backed bank’s plan to buy up to £1.5bn worth of shares from the government won’t happen until 2020, a year later than it previously expected.
It also believes political uncertainty related to Brexit will lead to a delay to interest rate hikes until the second half of 2020, which will hit RBS earnings.
Morgan Stanley said lower rates and share buybacks drive its decrease in earnings estimates for RBS.
“With less yield support in the short term, and our earnings below guidance and consensus, we remain Equal-weight,” it said.
'Low visibility' on Barclays' investment bank
Barclays PLC (LON:BARC) was also left at ‘equal-weight’ but its target price was reduced to 180p from 200p.
Morgan Stanley said low visibility on the lender’s under-pressure investment bank keeps it cautious.
Activist investor Ed Bramson, whose investment vehicle Sherborne Investors owns a 5.5% stake in Barclays, wants the lender to scale back the investment bank to improve shareholder returns.
But Barclays has plans to improve the performance of its investment bank rather than cut it back.
“We see a slow turnaround in the markets business and consequently our c.8% 2020e return on tangible equity lags the 9/10% company targets 19/20E,” Morgan Stanley said in its base case for the bank.
“Litigation remains unsolved and with capital still a focus, we think payouts will remain contained.”