Lloyds to hand shareholders over £17bn by 2027, analysts say
Lloyds Banking Group shareholders are set for a bumper payout with analysts projecting the lender will return over £17bn to investors by 2027.
The FTSE 100 giant was listed as Jefferies analysts “preferred” banking stock following a strong year-to-date performance.
Shares in Lloyds have jumped over 50 per cent since January. The bank received a hefty boost following the motor finance ruling that bolstered its market value by £3.56bn.
Jefferies analysts Jonathan Pierce and Piriya Rathod said Lloyds’ “longer than average” structural hedge would boost takings in the year to come. Structural hedging is key strategy deployed by banks to shield profits from interest rate swings.
The bank is set to benefit with old earnings hedged on lower rates maturing and set to be replaced with new ones at the present higher interest rates.
This boost from this strategy alone is set to add over £1bn to Lloyds’ profit in both 2027 and 2028, they said.
The £17bn pencilled in for distributions marks a 20 per cent upside to market consensus. But analysts believe a “move to a half-yearly buyback program could add around £1bn to this as early as next year”.
They added Lloyds’ strong hedge meant it “may overtake” its domestic-focused rival Natwest’s return on tangible equity, which measures how efficiently a bank uses its core capital to generate profits.
Natwest is expected to face a slowdown of near £750m due to disadvantages in its structural hedge.
Natwest exposed to lower rates
The Bank of England has slashed rates to four per cent from a post-financial crisis high of 5.25 per cent last year. The rapid reduction has squeezed the interest income of top banks, which pocketed sky-high profits on the back of record rates.
It poses a headache for Natwest whose structural hedge has acted as a crucial stable form of income.
Unlike Lloyds, the majority of Natwest’s hedges are on a shorter-term, five-year cycle. This means the bank will see the profits from its high-yielding hedges roll off and be replaced sooner than its rivals making it “more exposed to lower rates”.
The group’s shares have risen nearly 40 per cent this year, but Pierce and Rathod said Natwest’s success in already “in the shop window”.
Still, the analysts maintained their ‘buy’ rating on the stock arguing the predictable numbers still made an attractive investment.
“Part of the beauty of the Natwest story is its predictability, but that may also limit scope for further upside surprise,” they added.