Broker snap: Investec stays a buyer of Lloyds

16th May 2012 11:05

Investec has maintained its buy recommendation and 40p target price for banking group Lloyds, saying it remains a buyer 'at this level of distress'."In a somewhat bizarre way, we are comforted by the fact that investors are increasingly dismayed by Lloyds's incredible shrinking 'core' business," the broker said."It signals tacit acceptance that Lloyds's balance sheet repair is so well advanced that attention can (rightly) move on to the anaemic returns that the group is set to generate for many years to come."Nevertheless, Investec says that it can still support the re-rating to 0.7 times tNAV (tangible net asset value), from 0.5 times, "that such weak returns do arithmetically justify".The broker says that by 2015, Lloyds should be able to improve its return on equity (RoE) to "the heady heights of 9%". With NAV-per-share growth to 77p and RoE reaching 9%, Investec's 12-month forward valuation gives a price target of 40% which should be "a source of encouragement for shareholders"."40p is a source of disappointment to the UK's political elite invested at 74p. Lloyds may suffer less than sector peers if/when the ICB recommendations are eventually implemented, but we believe there is still huge value destruction wrought by the increase in UK/European regulatory cost, of which endlessly higher capital requirements are just a part."BC