Broker snap: Credit Suisse a dissenting voice on Lloyds

1st Jul 2009 11:43

The love-fest for British banks from brokers this week came to an end Wednesday when Credit Suisse cut its price target for part-nationalised lender Lloyds Banking Group.While conceding that sentiment towards the bank was improving, Credit Suisse is in no hurry to join the fan club. "Some of our concerns are short term, like shrinking deposit revenue that we don't think will be significantly assisted by structural hedges. Indeed, we doubt HBOS, which accounts for 56% of Lloyds' deposits, has any significant formal hedge in place," the Swiss bank said."There's also increasing basis risk. We don't have the numbers for Lloyds TSB but HBOS now has over £90bn more funding priced off Libor than assets," the bank's research note continued.As for medium term concerns, these include "the fact that 19% of HBOS corporate loans (excluding overseas and financials) are not paying." Credit Suisse sees HBOS's income falling as it writes off these non-performing loans.Although one of the major appeals to Lloyds in taking on the crippled lender HBOS was the dominant position it would give it in the UK deposits account market, Credit Suisse sees competition in this market intensifying, which will have an adverse effect on Lloyds' margins."Similarly, terming out its relatively short funding structure will also likely push income lower - Lloyds latest unsecured term issue cost swaps + 310 basis points. In time, better asset yields should partly offset these issues, but we expect weak new business volumes and the mix effect of writing higher quality lending to delay the impact," CS notes. Over the longer term Credit Suisse has concerns over "pre-funded deposit protection schemes, more onerous capital requirements - particularly as risk weighted assets re-inflate - and the potential impact of any EC ruling.""With the outlook so unclear, we don't much like the concept of 'normalised EPS', but we think 8p post 2012 is reasonable. This is 6p in present value terms and given the risks, that leaves Lloyds looking expensive, in our view," CS concludes.The bank has trimmed its price target for Lloyds to 50p from 55p.