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Investing.com -- Morgan Stanley (NYSE:MS) in a note dated Tuesday has upgraded Lloyds Banking Group (NYSE:LYG) (LON:LLOY) to "overweight," raising its price target from 70p to 90p, citing accelerating net interest income (NII) growth, stronger-than-expected performance in other income segments, and reduced uncertainty around motor finance litigation.
The brokerage expects Lloyds to outperform its own guidance for 2025 NII of £13.5 billion, with the structural hedge set to boost NII further in 2026.
Morgan Stanley estimates 6% NII growth in 2025 and 9% in 2026, underpinned by higher deposit yields and ongoing repricing of liabilities.
The analysts suggest there is additional upside if current deposit trends hold, with the bank’s January system data and deposit pricing tracker for February indicating better margins than previously expected.
Beyond interest income, Morgan Stanley projects other income to rise 8% in 2025 and 7.5% in 2026, driven by growth in insurance products and recent acquisitions like Tusker.
Analysts believe the market is underestimating the visibility of this revenue stream, positioning Lloyds to outperform consensus estimates.
On motor finance litigation, Morgan Stanley sees the risks as more contained than before. The bank has already provisioned £1.15 billion, with the Supreme Court expected to rule on the case between June and July.
The brokerage maintains a £2.1 billion base-case liability estimate, with a £1 billion margin of error already factored into the valuation.
The worst-case scenario is projected at £4.5 billion. Despite the lingering uncertainty, Morgan Stanley says the provisions are manageable, supporting its decision to lower the cost of equity estimate to 12%.
Improved earnings visibility and a more contained litigation risk have prompted Morgan Stanley to raise its 2026 and 2027 earnings per share estimates by 8% and 9%, respectively.
The analysts also expects Lloyds to return £2 billion in share buybacks in 2025, up from £1.5 billion previously.
Lloyds shares have risen more than 30% year-to-date, largely catching up after underperforming in 2024.
However, Morgan Stanley argues the stock remains undervalued, trading at 6.8 times 2026 earnings compared to the sector’s 8 times. The bank’s total yield — combining dividends and buybacks — is projected at 10%.