Goldman Sachs keeps Barclays and Lloyds at 'sell'

Goldman Sachs reiterated its 'sell' recommendation on shares of Lloyds and Barclays, placing both stocks on its list of 'UK Sell Ideas' for 2018.

Analysts at the investment bank pointed to evidence of lower margins on mortgages and intensifying competition on deposits as reflected in the lenders' latest third quarter financials as the main cause of their 'bearishness'.

Those pressures would continue in 2018, they said, as rival HSBC increased its share of the UK mortgage market via increased use of the intermediary channel and as the drawing window for the Term Funding Scheme closed shut in February.

Making matters worse, the Bank of England's latest set of stress tests showed the lender now had reduced headroom than in 2016 and the 2018 edition of the stress tests would include a roughly 200 basis point D-SIB buffer.

As a result, Goldman said: "Investors are therefore increasingly focused on whether the group will be permitted to continue operating in line with its current target capital level (a c.13% CET1 ratio). In our view, upward pressure on capital could in turn impact the group’s potential for dividend growth."

Indeed, Goldman's Martin Leitgeb had calculated the dividend pay-out would come in at 3.2p per share between 2017 and 2019, versus the company-compiled consensus for between 4.2p and 5.0p.

For Barclays, Goldman said it was facing two challenges, its lower capital capital position versus peers and the subdued operating trends at its investment bank.

"Barclays’ current CET1 ratio of 13.1% (3Q17) includes most of the benefit from the Africa disposal, but no impact from potential settlement costs [with the US Department of Justice]."

"Overall, we see no meaningful change to our previous shortfall range of c.£2-8bn for Barclays, as the increase relative to UK peers is mainly driven by a larger excess capital position at RBS."

Goldman's target prices for the two lenders were 53.0p and 170.0, respectively.