Last week, analysts at Citigroup (NYSE:C) reduced their forecast for Lloyds Banking Group (LSE:LLOY) shares. From previously having it at 68p, it was reviewed and lowered to 60p. Given that the current Lloyds share price is 57p, it indicates basically no meaningful potential in the coming year. Yet does this make sense?
Looking at forecasts
The Neutral rating that the research team has put on the stock means it doesn’t see much opportunity in the coming year. However, I should note that forecasts from banks and brokers aren’t always correct. As such, I need to take this with a pinch of salt.
Of the current broker forecasts that I’m seeing, one has the stock with a Sell rating, six as Neutral and 10 as Buy. Therefore, the balance from those in the industry is still weighted towards buying the stock for further potential gains. Yet the downward revision from Citigroup is in focus because it’s fresh off the presses!
At the moment I can’t see any detailed commentary as to why the decision was made, but would expect to see something come through in the next few weeks. This will likely catch investors’ attention.
A potential concern
One reason why the view of the bank might have moderated is based on the impact of falling interest rates. The Bank of England cut the base rate at the August meeting by 0.25%. This was the first decrease since the start of the pandemic back in 2020.
The view is that at least one more cut is coming before the end of the year. The decrease acts to reduce the net interest margin for Lloyds. Put another way, it reduces the profit that it can make via the difference in the rate charged on loans versus what it pays out on deposit.
The anticipation of the fall has already been noted. The half-year results showed net interest income down 10% versus H1 2023, but the management team said this was “as expected”.
Taking a step back
I’m not too worried about the impact here. Most people are aware that interest rates will fall, so if investors were genuinely worried, I think the Lloyds share price would already have dropped significantly.
Further, let’s not forget that lower interest rates actually help to boost economic activity. Cheaper mortgage rates should see demand spike, as well as higher spending on credit and debit cards. This should all contribute to higher revenue for Lloyds.
On a separate note, Lloyds shares at 57p don’t look overvalued. The price-to-earnings ratio is only 7.42. This is well below my fair benchmark level of 10. So from this perspective, I wouldn’t say that 60p is a ceiling. I already have enough exposure to the banking sector, but if I didn’t, I’d look to buy Lloyds shares.
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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
