JP Morgan bumps up target on Lloyds, positive on MBNA purchase
Analysts at JP Morgan raised their target price on shares of Lloyds, highlighting the lender´s "underappreciated" ability to generate capital while giving short shrift to some market watchers' concerns relating to management´s choice of balance between paying dividends and pursuing acquisitions, such as the purchase of MBNA.
Banks
3,895.51
17:09 19/04/24
FTSE 100
7,895.85
16:59 19/04/24
FTSE 350
4,341.08
17:09 19/04/24
FTSE All-Share
4,296.41
17:08 19/04/24
Lloyds Banking Group
50.92p
16:34 19/04/24
JP Morgan said it was unlikely that Lloyds would disappoint market expectations and retained their forecast for a 2016 dividend of 3p per share and upgraded their earnings per share estimates for 2017 and 2018 by 9% and 7%, respectively.
The broker also upped its target price from 70p to 75p, while reiterating its 'overweight' stance on the shares.
Lloyds had a 'best-in-class' core Tier 1 capital generation ability, which in their opinion drove the upside on its dividend per share.
The analysts predicted Lloyds would generate more than 70 basis points of CT1 during the first half of 2017, above its normal dividend accrual.
Hence, management could either channel that to part funding the purchase of MBNA (80 basis points) or rely on profits generated over that time span.
The latter option would allow it to pay out a special divi of as much as 1.8 per share on top of the ordinary divi of 2.55p for fiscal year 2016.
JP Morgan believed the special divi would be 0.45p.
As well, reducing its branches by a third, over time, could also result in additional EPS upside of between 6% and 8%, the broker said. Worries about the risks stemming from the MBNA transaction for the lender´s level of risk were also "overdone".
On a related note, analysts Raul Sinha, Vivek Gautam and Kian Abouhossein said: "We note that if RBS (Underweight) were to make a $3bn provision for DOJ on RMBS, its CT1 would fall to 13.6% at Q4, leaving capitalization similar to Lloyds but the shares significantly more expensive at 11.4x 19E PE vs Lloyds 9.6x PE 19E and with a material govt. overhang remaining. Investors concerned about the impact of Brexit on London should underweight MTRO & CYBG."