Lloyds Banking (LON: LLOY) shares declined 2.8% on Tuesday after Keefe, Bruyette & Woods downgraded its rating for the stock to Market Perform from Outperform.
Despite a slight recovery of 0.8% on Wednesday, the firm’s analyst cautioned that Lloyds is now the “most expensive UK bank” in terms of price-to-tangible book value, despite ranking only third in profitability.
Keefe also raised its price target on Lloyds to 75p from 65p a share but expressed concerns over the stock’s valuation.
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The firm acknowledged the bank’s solid Q4 results but prefers NatWest Group (LON: NWG) due to concerns about ongoing motor finance redress risk at Lloyds.
While Keefe remains positive on UK banks overall, citing the benefits of amortizing hedges, the firm believes Lloyds’ valuation does not adequately reflect potential risks.
While Lloyds’ shares have been on a strong run in recent months, Tuesday’s downgrade signaled some caution regarding further upside at current levels. The stock is down over 7% in the last week.
However, earlier this month, Lloyds was upgraded to Overweight from Equal Weight at Morgan Stanley, with the bank raising its target for the stock to 90p from 70p, citing the accelerating net interest income growth and a “more reassuring message” on Motor Finance for the upgrade.
Morgan Stanley told investors it believed the stock had further upside ahead.
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