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Goldman Sachs slashes Lloyds earnings forecast 98% due to coronavirus

Analysts expect no dividends to be paid this year by the UK banks, apart from HSBC

Lloyds Banking Group -

Goldman Sachs analysts have torn down their forecasts for banks to reflect a “sudden stop” to the global economy from the coronavirus crisis, with Lloyds Banking Group PLC (LON:LLOY) and Virgin Money UK PLC (LON:VMUK) revised down the hardest.

Using the investment bank’s latest macroeconomic forecast, the analysts lopped off a huge €120bn from the European banking sector’s income for the coming three years, front-loaded to 2020.

Analysts said they no longer expect any dividends to be paid this year by any of the UK banks apart from HSBC.

For Lloyds, the Goldman analysts took an axe to their earnings per share forecasts for this year and next, hacking down 98% for 2020 and 53% for 2021 “reflecting marked increase of our cost of risk forecasts”. 

That said, the analysts said various government measures implemented to support the economy “could mean that actual risk costs might be markedly lower than we forecast”, with government guarantee schemes perhaps resulting in lower than forecast levels of risk-weighted assets. 

Kept on a ‘sell’ rating, Lloyds’ share price target was cut by almost a third to 32p, below the previous day’s 33.5p close price. 

Forecasts for Virgin Money were even harder hit, with the EPS estimates scorched 185% and 72% lower, based on assumptions that loan losses will be in line with sector averages, though actual loan losses could be materially lower or could be positively impacted. 

Still on a ‘neutral’ rating, VMUK’s target price was cut 44% to 100p, which would offer 64% upside to the last close price.

Royal Bank of Scotland Group PLC (LON:RBS) remained a ‘buy’, with a target price cut 20% to 225p, a level that would offer potential upside of 87% to the last close.

RBS earnings forecasts were cut 88% and 44% for this year and next.

Global giant HSBC PLC (LON:HSBA) was another still rated ‘buy’ and on Goldman’s conviction list, as EPS estimates were cut 28% and 11% and then by 6-7% thereafter. 

Analysts cut their estimate for HSBC’s dividend from US$0.51 to US$0.31 per share and their 12-month price target by 1% to 745p. 

Key risks to the view on HSBC would be prolonged disruption in HK and China, weaker macroeconomics and delays in the execution of the bank’s restructuring plan.

Fellow Asia-focused lender Standard Chartered PLC (LON:STAN) also remained at ‘buy’ as 2020-2021 EPS estimates were decreased 38% and 20% but the share price target only by 2% to 850p, which would offer upside of 82%.

Barclays was still rated ‘neutral’ by Goldman, with a target price of 150p after a 30% cut, a level that would offer 54% upside.

Smaller lenders “well prepared”

Also on Tuesday, broker Peel Hunt published its own assessment of the ability of the challenger banks and mid-sized specialist lenders to withstand varying levels of loan losses and concluded that “the sector faces the downturn well prepared”.

Peel Hunt's analysts said, in their view, “the funding issues that caused problems for banks during the global financial crisis are less likely to recur following the sector restructuring of balance sheet liabilities”.

Central banks and governments have been quick to act and the analysts anticipate that if conditions deteriorate further, the authorities will be willing to extend more assistance to the sector.

In terms of individual mid-sized Close Brothers Group PLC (LON:CBG) "appears well positioned" in absolute terms and relative to other banks "and the investment case should be attractive when sector uncertainties abate".

Secure Trust Bank PLC (LON:STB) has, in the analysts' view, "the least capacity to absorb higher loss rates and we remain cautious".

Paragon Banking Group PLC (LON:PAG) and OneSavings Bank PLC (LON:OSB) are both "particularly well positioned" for profits to absorb significant potential increases in bad debt.

Quick facts: Lloyds Banking Group

Price: 36.71 GBX

Market: LSE
Market Cap: £25.96 billion

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