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Lloyds tail risks receding, says Goldman as it upgrades

By Michele Maatouk

Date: Tuesday 12 Mar 2019

Lloyds tail risks receding, says Goldman as it upgrades

(Sharecast News) - Goldman Sachs upped its stance on Lloyds Banking Group to 'neutral' from 'sell' on Tuesday, lifting the target price to 66p from 57p as tail risks recede.
GS said its 'sell' thesis was predicated on its assumption that ring-fencing would result in lower mortgage pricing and thus adversely impact Lloyds' profitability.

"While mortgage pricing has fallen markedly since, Lloyds has been able to offset this through consequent deposit repricing, changes in loan book mix and increases in the structural hedge.

"Two base rate hikes have also helped. This, together with benign asset quality trends resulted in Lloyds outperforming our banks coverage."

It noted that since adding the shares to the 'sell' list in September 2016, they are up 13.9% versus Goldman's coverage down 0.1% and the FTSE World Europe up 8.5%.

Goldman said it now incorporates two further base rate hikes in its estimates and lowers its cost of equity assumptions to reflect receding tail-risks.

"Lloyds should benefit from higher rates through its structural rates exposure (equity and non-interest bearing deposits) and deposit beta (i.e. by not passing on the benefit of rate hikes in full to interest bearing deposits).

"However, we continue to forecast lower mortgage pricing to adversely impact profitability. That said, further rate hikes are likely to reduce the overall impact somewhat."

At 1530 GMT, the shares were up 1% to 62.38p.

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