RBC Capital Markets downgraded Lloyds Banking Group (LYG) to “sector perform” from “outperform,” pointing to intensifying competition for UK customer deposits as a central concern.
Shares in the British lender fell nearly 2% as of 07:10 ET on Friday, reflecting investor concern over the revised outlook.
RBC trimmed its price target on Lloyds to 115 pence from 124 pence, a reduction that signals a more cautious view of the bank’s near-term earnings trajectory.
The firm described deposit competition as an “underappreciated” risk to Lloyds’ profit margin on lending, suggesting the market has not fully priced in the pressure.
RBC stopped short of cutting the rating to “underperform,” citing a share price it considers cheaper than peers as a limiting factor in the downgrade decision.
The broker acknowledged that income from Lloyds’ structural hedge should still provide a material boost to net interest income, the gap between loan earnings and deposit costs.
RBC said it currently prefers banks with a narrower ring-fenced perimeter, meaning less of their business sits inside the unit designed to protect everyday banking from riskier activity.
The broker also favors banks with lower loan-to-deposit ratios, which it linked to greater flexibility in setting deposit rates, and said Lloyds meets neither of those criteria.
Lloyds posted a group loan-to-deposit ratio of 98% in the first half of 2026, compared with 63% at Barclays and 56% at HSBC, according to RBC’s figures.
RBC cited several forces likely to sustain deposit competition, including structural hedge gains being competed away, the Bank of England’s balance sheet reduction, and shrinking excess deposits across the broader banking system.
The analysts also named stronger competition from government-backed savings provider NS&I and the UK’s Targeted Support rules as additional headwinds for Lloyds.
RBC cut its 2028 pre-tax profit estimate for Lloyds by 6%, driven mainly by lower net interest income after reducing both its margin and loan growth forecasts.
The broker now expects Lloyds’ 2027 loan growth at 2.9%, down from a prior estimate of 3.9%, and also raised its estimate of costs from depreciation on leased vehicles.
RBC’s 2028 pre-tax profit forecast sits 6% below market consensus, with structural hedge income projected at £8.4 billion in 2027, £9.4 billion in 2028, £10.3 billion in 2029, and £11.0 billion in 2030.
Despite the downgrade, RBC still expects Lloyds to meet its return targets, forecasting reported return on tangible equity of 19.1% in 2028 and 20.7% in 2030, against Lloyds’ own guidance of more than 18% and about 20% respectively.
RBC projects total shareholder returns of £31.3 billion over 2026 to 2030, comprising £15.5 billion in dividends and £15.8 billion in share buybacks, though buyback forecasts for 2027 through 2030 were lowered.
The brokerage’s scenario analysis places the Lloyds share price at 140 pence in an upside case and 75 pence in a downside scenario, illustrating the wide range of possible outcomes.
Key risks to the rating include a potential tax on banks in the next UK budget, a slowdown in the UK economy, and a provision top-up tied to the Financial Conduct Authority’s review of motor finance.
