Lloyds share price: what’s the outlook?

Davy Research upgraded Lloyds stock this week, following a strong first quarter amid a challenging banking environment, but how will the lender perform as in the latter half of the year as Brexit come to the fore again?

Lloyds Source: Bloomberg

Earlier this week, the Ireland-based brokerage Davy Research upgraded Lloyds stock to ‘outperform’ due to the bank being ‘less dependent on growth due to its superior capital generation’ compared with its rivals like Barclays and Royal Bank of Scotland (RBS), giving it a foundation for driving significant returns in the years ahead.

But despite Lloyds' strong start to the year and signals of better things to come for the bank, the real test will come as Brexit comes to the fore nearer the October 31 deadline, especially with the prospect of a no-deal more likely after Nigel Farage’s Brexit party swept the EU elections.

Lloyds: the silver lining for the UK banking sector

As the bank outlined in its full-year results back in February, Lloyds ended 2018 with a strong financial performance that has put it on stable footing for the year ahead.

Lloyds profit increased 24% over 2017, and earnings per share climbed 27%, with the bank seeing a major improvement in its overall efficiency that saw its cost-to-income ratio hit 49.3%, despite significant investment as part of its growth strategy.

So far this year, the bank has performed significantly better than its rivals Barclays and RBS, though all three lenders kicked off the 2019 earnings season with underwhelming results.

According to Investec Securities analyst Ian Gordon, the Prudential Regulation Authority decision to grant Lloyds with the ability to reduce its risk buffer ahead of its Q1 results helped support its share price by giving the option to proceed with a £1 billion share buy-back programme in 2019.

The regulator’s decision also helped Lloyds offer the banking sector a bit of hope, with its Q1 results coming in below market expectations, but faring better than Barclays and RBS.

Lloyds adjusted revenues came in 4% below market consensus at £4.4 billion, while pre-tax profits of £1.6 billion came also came in short of the mark.

Lloyds warns of Brexit uncertainty taking its toll

Even though analysts from Davy Research believe the stock has the potential to hit a target price of 71p a share, Lloyds has warned investors that Brexit uncertainty continues to loom large over the UK banking sector and could hurt its performance.

However, despite the bank vocalising its fears about Brexit and the wider impact it could have on the UK economy, Lloyds remains on track to deliver a strong performance this year.

‘While Brexit uncertainty persists, and continued uncertainty could further impact the economy, I remain confident that our unique business model, and in particular our market-leading efficiency and targeted investment, will continue to deliver superior performance and returns for our customers and shareholders,’ Lloyds CEO Antonio Horta-Osorio said.

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