In a note to clients on UK banks, RBC maintained an ‘outperform’ rating on Lloyds but lowered its target price to 75p from 80p.
The broker said Lloyds has maintained the highest mortgage rates in the sector but sacrifices market share as a result.
“We expect a more positive mortgage market spread environment to benefit Lloyds through growth more than margin as other rates in the market converge with Lloyds, leading to more stable margin but perhaps better growth as the market normalises,” it said.
“Lloyds has a greater proportion of term deposits than other UK banks which helps.”
Mortgages account for about 65% of Lloyds’ business, the highest of the large cap banks, while 23% is corporate loans.
RBC said loan losses on mortgages and consumer credit are more correlated to unemployment and corporate losses than to UK economic growth so Brexit is unlikely to have less of an impact on Lloyds than other sectors.
“UK unemployment remains low and wage growth above inflation and we expect the economic impact of Brexit to impact the corporate sector more,” the broker said.
RBC pointed out tLloyds' shares have risen by 11% in the year to date, compared to 1% for the rest of the market. It raised its underlying profit estimates by 1-2% for fiscal years 2019 to 2021.
RBC upgrades CYBG
RBC raised its recommendation on CYBG to ‘outperform’ from ‘sector perform’ and maintained its target price at 250p after the bank announced on Wednesday that it would be rebranding itself as Virgin Money.
“CYBG trades at a very low 0.6x tangible book value considering the strength of the Virgin Brand; the ability of management to deliver on costs; a medium term 12% return on tangible equity target,” it said.
However, it still cut its pre-tax profit estimates by 70% for 2019 and by 48% for 2020.
RBS 'more exposed to Brexit'
RBS, which is still 62%-owned by the government following its 2008 bailout, restarted dividends last year after turning around profits and settling with the Department of Justice over mortgage-backed securities – the biggest litigation issue hanging over it.
“RBS offers a very attractive capital return at the current share price but we see the company as more exposed in most Brexit scenarios and even more so if there is a general election,” RBC said.
It added: “In 2019 we expect a 7.5p dividend; a 10p special; and £1.2bn of directed buyback of the government stake.”
RBC cut its pre-tax profit estimate for 2020 by 1% but left forecasts the same for 2019 and 2021.
Barclays' dividend yield lower than other big banks
It said Barclays has one of the lowest valuations in Europe and it prefers the higher capital generation and yields of other UK banks, which are less reliant on investment banking to drive earnings expansion.
The broker expects 8% growth in Barclays’ dividend for 2019 and a £1bn buyback as the lender now exceeds its 13% capital target.
“This leads to a total yield of 8.2%, which is much lower than 11% at LLOY and 14% at RBS and is the only metric where Barclays screens with less value.”
RBC maintained its pre-tax profit estimates for 2019 and 2020 but raised its 2021 guidance for Barclays by 4%.