Broker snap: L&G vulnerable to market reverse

23rd Jun 2009 11:10

Legal & General was the worst performing blue-chip in early trading on Tuesday after Societe Generale (SocGen) recommended selling the shares.SocGen previously advised holding the shares. It has cut its earnings estimates for the current financial year and next, resulting in a reduction in projected earnings per share of around 2p in both years.'Although we do not expect significant additional default risk provisioning, implying an improvement in risk product margins, we do expect L&G [Legal & General] to continue to struggle in savings products as a result of lower asset balances, which in turn generate lower fees (and this despite its increased focus on reducing costs)," the broker said.On the bright side, SocGen believes that the rebound in equity markets since 9 March has lowered the likelihood of L&G seeking to improve its capital base, but the insurer remains vulnerable to a market reverse, as it "still has the highest exposure to equities among the UK life stocks we cover.""In addition L&G has lower provisions against bond defaults. These two factors support our view that L&G is the highest risk stock in the group and thus merits a discount," the bank concluded.