Lloyds Banking target hiked by Credit Suisse as UK path to recovery becomes less uncertain
Lloyds Banking Group PLC (LON:LLOY) is likely to be the biggest beneficiary of the UK banks from the reduced uncertainty for the UK from the improving economy and diminishing threat of a Scottish independence vote, according to Credit Suisse.
After the SNP failed to gain a majority in the weekend’s count of the election last week and following the Bank of England upping its UK economic growth forecasts, “the path of the recovery has become less uncertain”, the Swiss investment bank said.
“While risks remain, we think uncertainties have reduced, and hence we reduce our elevated cost of equity,” Credit Suisse analysts Omar Keenan and Findlay Williams said in a note to clients published on Monday.
The lowering of the UK cost of equity from 11.5% to 11% resulted in increases in share price targets for the UK high street banks.
Relative to the FTSE 100 and the Euro Stoxx banks index, UK bank shares are still cheap relative to historic PE multiples, the analysts added, and also trade cheaper than normal relative to UK international banks HSBC PLC (LON:HSBA) and Standard Chartered PLC (LON:STAN) despite the reducing uncertainties.
With all UK banks having seen positive earnings revisions in the past month except StanChart, the analysts said they think positive earnings revisions are “likely to continue”.
The next catalyst is expected to be an update from the Bank of England on the dividend payout restrictions that were put in place at the start of the pandemic, which is anticipated to come before 30 June.
Credit Suisse’s top pick in the sector is Lloyds, which has shown the best sequential improvement in net interest margins.