UBS analyst’s forecast 12p price rise would open up part-taxpayer-owned bank to sell-off of state stake
Shares in Lloyds Banking Group could get close to the level the taxpayer paid for its 39% stake in the bailed-out bank, the company’s house broker forecast on Monday – setting a price target for the shares of 72p.
The shares closed on Monday at 61.62p, still below the 73.6p average price that taxpayers paid for their stake in the bank. But they are above the 61p that the chancellor has signalled could be used as a point to begin a sell-off.
George Osborne is expected to use his Mansion House speech to the City later this month to set out his approach to reducing the taxpayer stakes in both Lloyds and Royal Bank of Scotland, in which the taxpayer has an 81% share holding, possibly through a distribution of shares to the public.
Raising his price target for the Lloyds shares by 12p, John-Paul Crutchley, analyst at UBS, said the bank’s profits should rise in the coming years as its margins began to rise while its costs and provisions for bad loans fall.
He set out the investment case of Lloyds as “a market-leading high-return UK retail bank where excess capital is distributed to shareholders”.
UBS, which acts as broker to the bank, said that Lloyds’ shares had risen 29% so far this year.
“Although recent performance has been strong, we see potential for further re-rating over the coming 12 months as Lloyds completes its transition from restructuring and shrinkage to profitability and balance sheet growth,” UBS said.
Lloyds has been selling off troublesome loans to bolster its capital position to plug a capital shortfall identified by the regulators and also shrinking its lending.
“We expect both core lending and mortgage lending to grow in the second half of 2013,” UBS said, as Lloyds will benefit from improving demand, government initiatives and a more resilient housing market.
“With regulatory dilution risk eliminated, we believe that the main consideration for a prospective Lloyds investor should be future earnings power and capital distribution,” UBS said.
Lloyds has not paid a dividend since it rescued HBOS in September 2008 and was banned from making such payments to shareholders by the European Union as a result of the bailouts. That ban has now been lifted but payments have yet to resume.
The 61p level for a potential sell-off emerged in March when the Treasury linked a potential bonus for the Lloyds boss António Horta-Osório to selling off part of the government stake at this price.
UBS expects Lloyds – which has sucked £6.6bn out of lending since June last year according to Bank of England data – to “open the tap” on new lending in the second half of the year, which will benefit the bank and the UK economy. Lloyds owns the Halifax, traditionally the country’s biggest mortgage lender.