RBC Capital Upgrades Lloyds Banking to Outperform Amid Supreme Court Ruling

Lloyds Banking has been upgraded to Outperform from Sector Perform by RBC Capital. The Supreme Court's motor finance judgement, which concludes no liability for the banks, is viewed positively by the market and considered a "clearing event" for Lloyds. The price target remains unchanged at 95 GBp.

Lloyds Banking Group (LLOY) has been upgraded to "outperform" from "sector perform" by RBC Capital Markets following a key Supreme Court ruling. The ruling, which was handed down on Friday, largely favored banks in a motor finance case, clearing a significant cloud over the UK banking sector [1].

The Supreme Court's decision rejected claims that banks and car dealers were liable for "dishonest assistance" or "bribery" in car finance deals. Instead, the court confirmed that dealers act in their own interests, not as agents of the bank or the customer. This ruling significantly reduces the potential compensation bill for banks, which was previously estimated to be around £18 billion but is now expected to be between £9 and £18 billion [1][2][3].

RBC Capital Markets, in its upgrade, highlighted several key factors that make Lloyds a strong performer. These include the bank's robust deposit franchise, earnings sustainability driven by a structural hedge, and an attractive total return yield. The bank's deposit franchise is seen as a significant advantage, particularly in a softer regulatory and interest rate backdrop [1][3].

The Financial Conduct Authority (FCA) is expected to launch a redress scheme later this year, but the sector's potential compensation bill is now seen as manageable. RBC Capital Markets estimates that Lloyds' tangible book value could face a 1.5% hit and the Common Equity Tier 1 (CET1) ratio could decline by 21 basis points under the base case. However, the bank's capital position remains strong, with a forecast CET1 ratio of 13.1% through 2027 [3].

RBC Capital Markets has kept its price target unchanged at 95 GBp, but the bank is now seen with 25% upside potential driven by reduced legal risk and improved earnings visibility. The bank's earnings per share (EPS) is forecast to grow to 12.29p in 2027 from 7.72p in 2025, around 8% above consensus. Dividends are expected to increase from 3.54p to 4.30p, with a total payout ratio peaking at 105% in 2025 [3].

Lloyds' net interest income is projected to reach £16 billion by 2027, supported by a structural hedge expected to contribute £8.3 billion. Operating costs are seen flattening at around £10.3 billion, and the net interest margin is forecast to improve from 2.97% in 2025 to 3.25% in 2027 [3].

The upgrade by RBC Capital Markets comes on the heels of positive earnings reports and strategic initiatives that have boosted investor confidence in Lloyds' future prospects. The bank's strong operational efficiency and strategic positioning have been highlighted by financial analysts, further supporting the upgrade [4].

References:
[1] https://www.lse.co.uk/news/rbc-capital-upgrades-lloyds-to-outperform-on-supreme-court-ruling-ukreqcoya0kh2re.html
[2] https://www.proactiveinvestors.co.uk/companies/news/1076018/lloyds-banking-group-after-supreme-court-ruling-clears-the-air-1076018.html
[3] https://www.investing.com/news/stock-market-news/rbc-upgrades-lloyds-to-outperform-after-motor-finance-ruling-clears-overhang-4167244
[4] https://stockstotrade.com/news/lloyds-banking-group-plc-lyg-news-2025_08_01/