A lawsuit against Lloyds Bank group is likely to garner plenty of negative publicity if its goes ahead. Investors will be concerned at what prospects this will hold in store for Lloyds Bank shares.

Under discussion will be the role played by senior members of the Lloyds board in 2007-2008, when the bank decided to acquire Halifax Bank of Scotland (HBOS).

While Lloyds is known to be devoting close to £20 million to the case, which is being brought on behalf of 6000 shareholders, and is being backed by a hedge fund, investment bank Credit Suisse says it believes the UK retail banking sector as a whole is being oversold by investors. It is not as bleak as some may believe, the Swiss bank argued in a recent note.

For starters, City analysts think that a hard Brexit is less likely than daily newspapers may have you believe. On top of that, the chance of a second referendum seems to be increasing by the week, particularly as the Labour opposition inches closer and closer to the idea. Credit Suisse reckons the economic picture for the UK remains sound and that this will be supportive for domestic banks’ capital generation.

Credit Suisse has raised its rating for Lloyds shares from neutral to outperform, increasing the target price to 80p. This follows EPS (earnings per share) upgrades to 11% for this year and 4% for next year. Robust asset quality and higher revenues should also be taken into consideration.

Ultimately, Lloyds shares could come out a winner if we see a soft Brexit scenario which might not be concluded until 2021. Lloyds shares have been de-rated relative to UK peers over the year to date. Lloyds bank has seen EPS consensus upgrades of 20% for 2018, reflecting quite massive optimism, which compares with a rise in the Lloyds share price of 9%.

“We would expect this domestic UK risk premium to reduce as 1) a softer Brexit becomes the market base case and 2) Lloyds’ earnings and capital generation remain supportive,” Credit Suisse says.

There have been concerns about the Lloyds net interest margin being under pressure: Credit Suisse says this is overdone, and is broadly in line with guidance for the fiscal year of close to 2.85%.

Lloyds shares jumped by 3.40% at the end of last month after the bank received an upgrade from Moody’s, the rating agency, to A3 from Baa1.

Dividends-wise, Lloyds shares are among the 10 stocks identified by stock broker AJ Bell as accounting for 58% of the FTSE 100 cash dividend payments, at an estimated 3%.

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12th October 2017
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