RBC Capital Markets downgraded Lloyds Banking Group (NYSE: LYG) to “sector perform” from “outperform,” pointing to intensifying competition for UK customer deposits as a core concern.
Shares in the British lender fell nearly 2% following the announcement, reflecting investor unease over the bank’s ability to defend its profitability in a tougher operating environment.
RBC cut its price target on Lloyds to 115 pence from 124 pence, describing deposit competition as an “underappreciated” risk to the bank’s net lending margins.
The broker stopped short of cutting the rating to “underperform,” citing a share price it considered cheaper than peers as a limiting factor in its downgrade decision.
RBC noted that income from Lloyds’ structural hedge should still provide a material boost to net interest income, the gap between what the bank earns on loans and what it pays on deposits.
The bank’s group loan-to-deposit ratio stood at 98% in the first half of 2026, a figure RBC highlighted as significantly higher than competitors, with Barclays at 63% and HSBC at 56%.
RBC said it prefers banks with a narrower ring-fenced perimeter and lower loan-to-deposit ratios, arguing those characteristics allow greater flexibility in setting deposit rates, and that Lloyds meets neither test.
The broker identified several structural pressures likely to sustain deposit competition, including the Bank of England’s balance sheet reduction, shrinking excess deposits across the banking system, and stronger competition from government-backed savings provider NS&I.
RBC also cited the UK’s Targeted Support rules as an additional competitive pressure, adding to the challenging deposit environment facing Lloyds and its peers.
The analysts cut their 2028 pre-tax profit estimate for Lloyds by 6%, driven primarily by lower net interest income forecasts, with 2027 loan growth expectations revised down to 2.9% from 3.9% previously.
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, both above Lloyds’ own guidance thresholds.
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 trimmed.
The brokerage’s scenario analysis places the Lloyds share price at 140 pence in an upside case and 75 pence in a downside case, reflecting a wide range of potential outcomes.
Key risks flagged by RBC include a potential bank tax in the next UK budget, a slowdown in the broader UK economy, and any provision top-up tied to the Financial Conduct Authority’s ongoing review of motor finance.
