RBC Capital downgrades Lloyds after shares hit price target

RBC Capital Markets downgraded Lloyds Banking Group on Friday to ‘sector perform’ from ‘outperform’ after the shares hit its 60p price target.

RBC said that trading at around 1x 1 year-forward TBV, Lloyds now looks expensive relative to peers, and it believes that the re-rating story will be much tougher from here.

RBC said it was updating its estimates after the bank’s second-quarter results this week and maintaining the price target.

"We continue to feel that LLOY is a well-managed bank with favourable strategic positioning, but we have run out of runway in valuation terms," it said.

"We did not downgrade to underperform due to: (i) the strength of the bank's deposit franchise, (ii) the certainty of momentum provided by the structural hedge, and (iii) a relatively attractive total return yield."

RBC sees asymmetric risk to the downside in the event of a bad outcome from the Financial Conduct Authority’s review of motor finance.

"Pre-results consensus included circa £1.1bn in remediation charges for the issue versus our conservative base case of circa £2.5bn," it noted. "We expect that a soft outcome could represent a positive catalyst, but the reward is not worth the risk, in our view. There is also a high probability that September's announcement yields no clear outcome, with the can being kicked down the road, extending the period of uncertainty regarding this issue."