Broker snap: Book profits on banks, Nomura says

16th Sep 2009 11:55

Broker Nomura Securities has warned that shareholders in UK banks should be wary of the potential for a reversal in the sector and advises banking profits.'The domestic UK banks have rebounded to valuations of 1.4x book value, with the Far Eastern banks on 2.2x. Consequently, we advocate booking some profits and downgraded Lloyds, Barclays and Standard Chartered to Neutral from Buy in our sector review this week,' the broker's analyst Robert Law said.Nomura reckons HSBC is the best stock in the sector. It rates HSBC a 'buy' with a price target of 750p. Conversely, Nomura thinks RBS holders should reduce their Royal Bank of Scotland holdings.The broker believes the ability of UK banks to achieve acceptable levels of profitability will be constrained by regulatory restrictions, as well as the requirement to maintain higher levels of equity capital and adopt more conservative funding structures.It also expects private sector loan demand to remain weak. 'Limited private sector loan demand combined with necessary fiscal consolidation could limit the pace of economic growth even in a recovery phase, in our view. This could lead to credit impairment charges remaining elevated for a more extended period,' Nomura warns.'We accept there are few obvious catalysts for a reversal in the gains in bank stocks in the short term, particularly while markets are positive about recovery. In our view, the main potential negatives would be disappointing macro data calling the recovery into question, or simply the scale of the rebound in shares and the valuations they have reached,' Nomura concludes.