Analyst Note| Niklas Kammer, CFA |
Narrow-moat Lloyds passed the Bank of England’s stress test. At its lowest point, Lloyds’ common equity Tier 1 ratio dropped to 7.8% from a starting point of 15% at the end of 2020, on a fully loaded basis. This was just above the minimum of 7.7% regulators believe Lloyds should hold in capital reserves. The stress test aims for a plausible and severe macroeconomic scenario, which is significantly more punitive than what the U.K. economy experienced during 2020. As such, we don’t view the tight margin to Lloyds’ minimum requirement at the low point as worrisome. The bank appears adequately capitalized, will retain functional without capital infusions in such a severe macroeconomic scenario, and does not rely on transitional accounting arrangements to smooth capital drawdowns throughout the stress. We maintain our GBX 68 per share fair value estimate.