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On Tuesday, Morgan Stanley (NYSE:MS) upgraded Lloyds Banking Group PLC shares from Equalweight to Overweight, adjusting the price target to GBP0.90, up from the previous GBP0.70. The increased target follows a notable year-to-date (YTD) rise in the bank’s share price, which has climbed 35.29%. According to InvestingPro analysis, Lloyds appears slightly undervalued at current levels, trading at an attractive P/E ratio of 11.56x while offering a substantial dividend yield of 5.51%.
Analysts at Morgan Stanley attribute the recent surge in Lloyds’ stock value to a recovery from last year’s underperformance, which they believe was influenced by a slower progression in Net Interest Income (NII) and ongoing Motor Finance litigation. They anticipate that Lloyds will experience a catch-up in NII within the next two years and expect to gain clarity on the litigation by mid-year.
In comparison to January 2024, Lloyds’ shares have seen a 50% increase in value, while its competitors, NatWest and Barclays (LON:BARC), have more than doubled. Morgan Stanley’s analysis suggests that a catch-up on NII is overdue for Lloyds. InvestingPro data reveals impressive returns of 64.68% over the past year, with multiple analysts revising earnings upward for the upcoming period. InvestingPro subscribers have access to 14 additional key insights about Lloyds, including detailed analysis of its financial health and growth prospects.
In 2021, Lloyds augmented its structural hedge by 30% to fully mitigate interest rate risks. However, this strategy effectively locked in a low yield, which analysts now believe will largely unwind by 2026. This forecast aligns with management’s guidance, which projects an acceleration in the structural hedge’s contribution from an incremental £1.2 billion in 2025 to £1.5 billion in 2026.
The upgrade by Morgan Stanley reflects an optimistic outlook for Lloyds Banking Group’s financial performance in the coming years, particularly regarding its ability to navigate interest rate risks and improve its NII. The bank has demonstrated its commitment to shareholder returns by raising its dividend for four consecutive years, with a significant dividend growth of 124.94% in the last period.
In other recent news, Lloyds Banking Group Plc (LON:LLOY) has announced a significant expected uplift in net interest income, with projections of £1.2 billion in 2025 and £1.5 billion in 2026. These figures exceed market expectations, according to Citi analysts, who maintain a Neutral rating on Lloyds with a price target of GBP0.61. Despite the positive outlook for 2026, Citi notes potential challenges in 2025 due to mortgage spread pressure and costs. Meanwhile, Lloyds is undergoing a multiyear system upgrade, prompting an evaluation of its IT employees’ technical skills. This assessment could lead to job losses for hundreds of workers, as employees have been informed about the possibility of needing to apply for new positions within the bank. The tech skills audit is based on a test conducted last year, and results will influence future roles within the company. These developments highlight Lloyds’ strategic focus on both financial performance and technological advancement.
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