(Sharecast News) - JPMorgan Cazenove downgraded its stance on Lloyds on Monday as it took a look at UK banks.
JPM said that with the scenario of further rate hikes well into restrictive territory now on the table, its house view is that probability of a hard landing for the UK economy is higher and it now expects earnings per share cuts for the UK banks to intensify with risks to capital return and asset quality.
"We are cutting our already below consensus EPS forecasts by another 3-9% for FY24/25 and are now double digits below consensus," it said.
"Our forecasts assume UK rates peak at 5.75% and with increased political pressure, we believe that deposit pass through is likely to be closer to 100% on interest bearing time deposits, with negative implications for deposit migration and loan books.
"We continue to see upside risk to near-term and 2023 NII but this is likely to be close to peak levels with higher downside risk in the medium term from any hard landing that will eventually lead to lower normalised rates and NIM."
As a result, JPM continues to take a cautious view on the outlook for net interest income (NII) and the banks on its 12-month view.
"Given the strong capital position and above normalised profitability of the UK banks, we also see increased political risks to earnings in the form of forbearance, pricing and windfall taxes, especially into 2024 with the election coming into view," it said.
As a result, JPM remains cautious and continues to see domestic UK banks underperforming the broader sector. It moved to a relative 'underweight' on Lloyds, from 'neutral', and maintained its preference for 'overweight rated Barclays, followed by NatWest, which it rates at 'neutral'.
Lloyds (LLOY)
