UBS upgrade and valuation
UBS raised its recommendation on Lloyds Banking Group to "buy" from "neutral" and increased its 12-month price objective to 115p from 110p. The broker framed the action as a response to an attractive entry point into what it described as a "strong growth, diversified, low risk franchise." The upgrade coincided with Lloyds' first-quarter 2026 results.
Quarterly performance and capital generation
In Q1 2026 Lloyds reported pre-tax profit that was 6% above company consensus, even after taking provisions linked to a weaker macroeconomic outlook and lower vehicle residual values. The bank delivered a 17% return on tangible equity for the period and added 41 basis points of CET1 capital, which UBS notes is equivalent to 1.7% of the bank's market capitalisation.
UBS' analysis points to a strong earnings trajectory: the broker expects earnings per share to compound at 17% between 2025 and 2028, and it projects a distributed yield of about 10% in 2026 compared with a European banking sector average of 6.9%.
Market context and implied upside
The stock was trading at 97p on April 29, which UBS says implies roughly a 20% total return to the new 115p target. In UBS' words: "We see current conditions providing an attractive opportunity to buy a strong growth, diversified, low risk franchise at a good price."
Income, margins and credit
Net interest income for the quarter came in line with consensus at 3.57 billion; the net interest margin rose by 7 basis points quarter-on-quarter to 317 basis points.
Impairments stood at 295 million, which was 22% below consensus and equivalent to 25 basis points of average loans. This level of impairments included a net 101 million charge related to updated macroeconomic scenarios.
Loan balances expanded by 1.1% quarter-on-quarter and 4.3% year-on-year to 486.2 billion.
Guidance and outlook
Lloyds upgraded its full-year 2026 net interest income guidance to more than 14.9 billion from approximately previously.
The bank now expects hedge income to rise by more than 1.5 billion year-on-year to more than 7 billion in 2026 and to more than 8 billion in 2027.
All other guidance was left unchanged: operating expenses are expected to be below 9.9 billion, impairments of approximately 25 basis points and a return on tangible equity above 16%.
Analyst forecast adjustments and valuation multiples
Following the results and guidance revision, UBS raised its 2026-2028 EPS forecasts by 3-4%, attributing the increase to higher income expectations and projected buybacks. UBS values Lloyds at 8.5 times 2027 estimated EPS, compared with a European sector average of 9.0 times, and at 1.6 times tangible net asset value. These multiples underpin UBS' forecast of an 18-19% return on tangible equity and imply a cost of equity of 12.3%, versus a sector cost of equity of 11.4%.
UBS' sum-of-the-parts framework produces a discounted value of 115p per share. Within that SOTP, retail banking represents 61% of total value and is applied a 2.4x price-to-tangible-net-asset-value multiple.
Scenarios and catalysts
UBS sets out an upside scenario at 131p, which assumes a net interest margin of 3.37%, other income of 7.45 billion and loan losses of 20 basis points. A downside case at 90p applies a 3.27% margin, 7.05 billion in other income and loan losses of 30 basis points.
UBS highlights the bank's July 30 strategic update, which will coincide with half-year results, as a positive catalyst. The broker expects any new targets extended to 2030 to include a cost-to-income ratio below 45% and a return on tangible equity of 20%.
Bottom line
UBS' upgrade rests on Lloyds' solid Q1 results, continued capital generation and a re-rated outlook for income and buybacks. The broker's valuation and scenarios provide an explicit path to upside and downside outcomes based on margin, other income and loan loss assumptions.