RBC Downgrades Lloyds on Deposit Competition Worries

Lloyds Banking Group (LON: LLOY) shares closed lower on Friday after RBC Capital Markets cut the bank to ‘sector perform’ from ‘outperform’. RBC, the research arm of Royal Bank of Canada, also trimmed its price target to 115p from 124p. Lloyds is a UK retail, commercial and insurance bank that owns Halifax and Scottish Widows.

The shares opened at 103p on Friday, 2.7% below Thursday’s close of 105.85p, then recovered to finish at 104.85p. That is down 0.94% close to close but up 1.80% from the open. The close is 10.5% below the 117.1p reached on the 5th of August and 26.5% above the 82.9p close of the 10th of October 2025.

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The downgrade was public before the London open, at about 7.34am, and Investing.com named the analyst as Benjamin Toms. RBC’s reasoning is that structural hedge repricing, the bank’s rolling protection that locks in rates, should still lift net interest income. The downgrade rests on something else:

today’s downgrade reflects our more cautious view on competition in the UK deposit market and second order implications for NIM, a dynamic we believe is underappreciated

RBC Capital Markets

NIM, or net interest margin, is the profit from lending after deposit costs. RBC prefers banks with narrower ring-fences, the separation of UK retail banking from investment banking, and lower loan-to-deposit ratios. It says Lloyds meets neither test.

RBC’s FY28 adjusted pre-tax profit forecast is 6% below consensus, the average analyst estimate. It stopped short of ‘underperform’ because valuation is undemanding, and its 115p target is still 9.7% above Friday’s close.

The weakness was partly specific to Lloyds. NatWest fell 1.19% on Friday while Barclays edged up 0.06%. By 10.50am Lloyds was down 1.6% at 104.20p and was also under pressure from reports that chancellor John Healey will raise taxes on banks in the Budget later this month.

Lloyds’ third-quarter results are expected on the 29th of October.