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Investing.com -- Lloyds Banking Group (LON:LLOY) was upgraded to “outperform” by RBC Capital Markets, which raised its price target to 95p from 75.74p, following a key Supreme Court decision that limited bank liability in motor finance claims, in a note dated Monday.
The bank is now seen with 25% upside potential, driven by reduced legal risk and improved earnings visibility.
The ruling rejected claims in equity and tort, with the court finding motor dealers acted independently and not as customer agents.
However, it upheld a statutory claim under the Consumer Credit Act in one case, citing commission size and misleading impressions as factors of unfairness.
The Financial Conduct Authority will consult on a redress scheme covering cases dating back to 2007, with a decision expected by early October.
RBC estimates sector-wide redress costs at £11.5bn in its central scenario, including £3.8bn for banks and £1.6bn potentially for Lloyds.
The forecast assumes repayment of unfair commissions plus 3% simple interest and £100 administrative cost per claim.
Lloyds’ tangible book value could face a 1.5% hit, and the Common Equity Tier 1 (CET1) ratio could decline by 21bps under the base case.
Despite this, analysts say the ruling provides clarity and removes a major overhang. Lloyds’ capital position remains strong, with a forecast CET1 ratio of 13.1% through 2027.
RBC projects adjusted return on tangible equity (ROTE) will rise to 17.9% by 2027 from 14.2% in 2025.
EPS is forecast to grow to 12.29p in 2027 from 7.72p in 2025, around 8% above consensus. Dividends are expected to increase from 3.54p to 4.30p, with total payout ratio peaking at 105% in 2025.
Net interest income is projected to reach £16bn by 2027, supported by a structural hedge expected to contribute £8.3bn.
Operating costs are seen flattening at around £10.3bn. RBC forecasts Lloyds’ net interest margin will improve from 2.97% in 2025 to 3.25% in 2027.
RBC cited Lloyds’ deposit franchise strength, earnings resilience, and attractive yield profile as key advantages over peers.