Lloyds Banking Group (LON: LLOY) shares slipped to 103.50p, a decline of 1.84%, as the stock underperformed the broader market amid a confluence of negative pressures.
Lloyds was among the worst performers in the banking sector alongside NatWest, as investor sentiment soured on reports of an upcoming tax increase targeting banks.
Chancellor John Healey is expected to raise taxes on the banking sector in his forthcoming Budget, a move that has rattled investors across the industry.
The prospect of higher sector-wide taxation has prompted traders to reassess their positions in major UK lenders, with Lloyds bearing a significant portion of the resulting selling pressure.
Adding to the headwinds, RBC Capital Markets downgraded Lloyds shares to “sector perform” from “outperform,” a shift that further dampened confidence in the stock’s near-term outlook.
RBC also cut its price target on Lloyds to 115 pence from 124 pence, citing deposit competition as an “underappreciated” risk to the bank’s profit margin on lending.
The Canadian bank pointed to several structural factors likely to sustain competitive pressure on deposits, including the Bank of England’s ongoing balance sheet reduction and shrinking excess deposits across the banking system.
RBC also flagged stronger competition from NS&I, the government-backed savings provider, as well as structural hedge gains being competed away and the impact of the UK’s Targeted Support rules.
The combination of fiscal policy risk and a high-profile analyst downgrade created a difficult session for Lloyds investors, with both factors reinforcing concerns about the bank’s earnings trajectory.
Deposit competition has been a recurring theme for UK banks as the interest rate environment continues to evolve, and RBC’s comments suggest the pressure on net interest margins may persist longer than the market had previously anticipated.
The downgrade and revised price target from RBC reflect broader anxiety about the sustainability of Lloyds’ lending margins at a time when competitive dynamics in retail banking are intensifying.
Investors will be watching closely for further developments around the Budget and any additional analyst commentary that could either deepen or relieve the pressure on Lloyds shares in the sessions ahead.
