RBC target suggests 26% upside on Lloyds’ share price

Having endured a slump for most of the year, Lloyds’s share price has been on the upswing as 2022 draws to a close. Helping sentiment has been analysts at RBC upping their target price on the stock. And in an effort to retain its top customers, Lloyds is planning to introduce a hyper-personalised service. However, as a bellwether of the UK economy, LLoyds’ stock is still vulnerable to lingering recession fears.

Lloyds’ share price [LLOY.L] has had a strong end to 2022. Having experienced a slump for most of the year, Lloyds stock has managed to bounce back 7.1% since 1 November, to close Friday 16 November at 45.18p.

Among the optimists are RBC. In a November research note, analysts at the Canadian bank upped their target on the stock to 57p from 44p -- a 26% upside on Friday’s close. According to the analysts, Lloyds will benefit from better cost control and asset quality compared with its competitors. They also noted that Lloyds is “attractive” on a number of valuation metrics.

But not everyone’s so bullish on the bank. Analysts at JP Morgan Cazenove downgraded Lloyds to ‘neutral’ from ‘overweight’ in a December note, striking a cautious note on the European banking sector as the global economy slows.

Wealthy customers in Lloyds’ sights

Lloyds hopes to boost returns by offering improved services to its wealthier clients, according to an internal presentation seen by the Financial Times.

Under the plans, Lloyds’ top customers would have calls put through to more experienced team members and get better compensation for complaints. The next customer level down would enjoy shorter call waiting times, flexibility on borrowing decisions and same-day branch appointments. Those at the bottom would receive standard services and be encouraged to self-serve online. 

Offering a more personal service could help cross-sell other Lloyds products and make customers think twice before shopping around for loans or mortgages. Lloyds told the paper that it was hoping to “deepen relationships with existing customers and develop a mass affluent offering”.

The bank wouldn’t be alone in offering a tiered service. HSBC, for example, has a Premier account for its higher earning customers.

The plans reflect a strategic shift to diversify its offering after years of mono-focus on traditional banking services. Affluent customers with income or wealth above £75,000 would be able to use self-managed investment services. The bank is also looking to expand its insurance offering. Having a diversified revenue stream could insulate the bank against any downturn in the UK economy, such as a slump in the housing market.

Lloyds’ share price surges in November

Lloyds’ share price surged mid-November. One reason was the surcharge on bank profits being cut to 3%, down from 8%. There had been speculation that the UK government would target banks to raise money.

Another major tailwind for Lloyds this year has been hIgher interest rates after years of ultra-low rates. Last week, The Bank of England raised interest rates to 3.5%, while in November the central bank predicted that rates could hit 5.2% in the fourth quarter of 2023, before receding. Lloyds’s stock is also arguably cheap, carrying a forward price-to-earnings ratio of 6.15.

For income seekers, Lloyds has steadily been increasing payouts, having paused dividends during the pandemic. The final payout in 2021 was 1.33 pence per share, well up from the 0.57p paid out in 2020, while the interim 2022 payout was 0.80p, up from 0.67p the previous year.

Despite interest-rate hikes and increased revenues, the pessimistic outlook for the UK economy has seen Lloyds’ share price range-bound between 40p and 50p since the start of April. Throw in the cost-of-living crisis, which could hurt mortgage sales, and it's clear that Lloyds isn’t out of the woods just yet.

To break through the 50p level -- and escape the drag of recessionary pressures -- Lloyds will need to deliver on its strategic ambitions. Investors picking up shares on the cheap may have to wait to see a return on their investment.