Lloyds Banking Group PLC (LSE:LLOY) shares are "significantly undervalued" despite the lender being "well placed" to benefit from further interest rate rises from the Bank of England, said analysts at Barclays.
Following third-quarter results from the FTSE 100-listed group and ahead of another expected BoE rate hike this week, banking analyst Aman Rakkar kept his rating at 'equal weight' but lifted the share price target 10% to 55p, which compared to the Tuesday's closing price of 42p.
As well as a valuation of six times 2023 forecast earnings and 0.85 times tangible net asset value, another attraction of Lloyds for the analyst is the expectation that it will return 30% of its market cap in shareholder distributions by 2024.
At the Q3 results last week, Lloyds' reported lower profits due to higher bad loan provisions (or expected credit losses/ECLs), but management upgraded full-year guidance for net interest margins (NIM), which the analyst estimated would see an improvement of 13 basis points on the second quarter to 3.11%.
This is a level which he expects will be "broadly sustained" through to 2024.
On the downside, this is set to be "substantially tempered" by rising operating expenses, which Barclays sees rising 6% year-on-year in 2024, given elevated inflation and rising investment spend.
On the plus side, like many sector peers, Lloyds is entering a period of economic uncertainty "from a position of relative and absolute strength," particularly following the building up of ECL reserves in the past quarter as a result of updated macro assumptions.
"Clearly risks remain from an uncertain macro (and policy) backdrop," said Rakkar, who said his team's forecasts were "relatively cautious" in they assume impairments of circa 35/40bps in 2023 and 2024 compared to the City consensus forecast of around 30bps across both years.
"Rising rates are a challenge to customer affordability [...] but the ‘answer’ on asset quality will ultimately be determined by unemployment," he said.
Risks are already captured in Lloyds' "attractive valuation", the analyst added.
The valuation includes a relatively high cost of equity, which was increased to reflect policy risks including potential higher taxes - though recent reports suggest this might not happen, with confirmation and further detail likely to come at the upcoming Autumn Statement on 17 November.