RBC Capital Markets has downgraded Lloyds Banking Group to "sector perform" from "outperform" on Friday, following the share price reaching its 60p price target.
The investment bank believes that Lloyds, trading at approximately 1x 1 year-forward tangible book value (TBV), now appears expensive compared to its peers. They anticipate that the re-rating story will be significantly more challenging from this point forward.
RBC attributed the downgrade to their updated estimates following Lloyds' second-quarter results earlier this week, while maintaining their price target. They acknowledged Lloyds' strong management and favourable strategic position but highlighted that the valuation had reached a limit.
"We continue to feel that LLOY is a well-managed bank with favourable strategic positioning, but we have run out of runway in valuation terms," RBC stated.
Despite the downgrade, RBC refrained from moving Lloyds to "underperform" due to a number of factors:
The strength of the bank's deposit franchise
The structural hedge providing certainty of momentum
A relatively attractive total return yield
However, RBC expressed concern about the potential downside risk from the Financial Conduct Authority's (FCA) review of motor finance. They noted that pre-results consensus included approximately £1.1bn in remediation charges for the issue, compared to their conservative base case of £2.5bn. While a positive outcome from the review could act as a catalyst, RBC believes the reward is not worth the risk. They also highlighted the possibility of the announcement in September yielding no clear result, delaying a resolution and prolonging uncertainty surrounding the issue.