Broker snap: Barclays upgrades Lloyds and RBS as re-privatisation talk ramp up

12th Jun 2013 11:03

Barclays Capital (BarCap) has raised both its ratings for part-nationalised lenders Lloyds Banking Group and Royal Bank of Scotland (RBS) as the government begins to come up with a plan to re-privatise the banks following their bailout in 2008.BarCap said that the key investment consideration when looking at the re-privatisation is whether the shares will underperform or outperform through the process. Citigroup outperformed the US banking sector in 2010 by 30% when the US sold down its 30% stake over eight months. While this is often cited as proof that re-privatisations drive share-price outperformance, the broker pointed out that this always isn't the case."More commonly, the initial tranche of a sell-down does well with much weaker performance as the process progresses and the sell-down takes years rather than months," analysts said.While BarCap has upgraded Lloyds from 'underweight' to 'equal weight' and hiked its target price from 40p to 65p, it expects the shares to be weak through the government sell-down."Lloyds shares are trading near the government's 61p carrying value, which, with capital building and earnings in recovery, should enable the government divestment process to begin relatively soon. This is positive in terms of market confidence in the bank's future and its return to normality but we see overhang through the sell-down process as a headwind for Lloyds' share price performance."As for RBS, its rating has been lifted from 'equal weight' to 'overweight' and its target price raised from 300p to 370p. The broker said that with near-20% upside to the government's carrying value, the overhand is much less of a concern for RBS."Although we expect the RBS sell-down to start later and factor in greater political risk through a higher cost of equity, a 50% price-to-book premium has opened up in favour of Lloyds - the highest since the government recapitalisation - for a similar medium-term return on tangible equity. "As a result we see greater scope for share-price outperformance at RBS, supported by our bottom-up valuation and we upgrade RBS to 'overweight'."Lloyds was up 0.39% at 61.43p by 11:36, while RBS was trading 0.55% higher at 329.3p.