JPMorgan downgrades Lloyds to 'neutral'
JPMorgan Cazenove has downgraded Lloyds Banking Group, warning that Brexit is weighing on the wider UK banking sector.
The bank said it was downgrading Lloyds to ‘neutral’ from ‘overweight’ after a 15% total return in 2019 and material capital return-driven outperformance since the end of 2016. "We had upgraded Lloyds in November 2016 due to its best in class capital generation, return profile and net interest margin resilience, which may continue if the UK reaches an economically positive agreement on Brexit," it said.
"However, we note the rising probability of a no-deal Brexit, which creates rising pressure on revenue and earnings per share and could weigh on capital build/return for all domestic UK banks as well as HSBC.
"We now also view Lloyds' relative attractiveness as being more in line with that of Barclays and Royal Bank of Scotland."
JPMorgan economists currently believe there is a 25% chance of the UK quitting the European Union without a deal.
The bank continued: "Given Lloyds has the highest return on tangible equity in the UK, at 15% versus 9-10% for Barclays, Royal Bank of Scotland and HSBC, its returns hurdle rate is higher, resulting in less competitive pricing and limited mortgage growth.
"We cut multiples for UK retail and business banking to reflect higher uncertainty, and reduce our Lloyds price target to 70p from 80p."
Looking ahead to the banks’ earning season, JPM added: "In our view, upcoming earnings are unlikely to be a positive catalyst for the UK banks with Brexit continuing to weigh on the outlook."
It believes the highlight will be RBS, which is likely to announce a special dividend, although it also cautioned: "We think RBS need to start buying back shares in a way that reduces the UK government stake for the market to turn more positive."
As at 1115 BST, shares in Lloyds were down nearly 1% at 57.38p.