Broker snap: Lloyds is Nomura's preferred UK bank

28th Jun 2010 08:29

UK banks are turning the corner, according to Nomura Securities, which has named Lloyds Banking as its preferred stock in the sector."UK banks are benefiting from a combination of declining impairments, rising margins and strengthened capital bases," reasons Nomura analyst Robert Law, adding that the domestic banks are trading on valuations at or below book value. "In the past, UK banking has proved a profitable industry and could be expected to be so again, as long as economic recovery continues, even if future returns are well below those achieved in the past cycle," Law asserts.Compared to their European counterparts the UK lenders are probably in good shape in terms of exposure to southern European markets and so should outperform their continental rivals, though performance versus the market as a whole is "likely to continue to be geared towards perceptions of economic recovery."The broker has raised its rating on Lloyds to "buy" and its target price from 53p to 80p. The part-nationalised lender is "particularly geared to the theme of domestic margin expansion owing to the repricing of mortgage asset yields and short-term wholesale funding," the broker beleives. "In addition, we believe that balance sheet restructuring will eliminate the double leverage of the capital deployed in the life insurance business by 2012, allowing it to be more highly valued in the group valuation," Law said.Nomura has kept its "reduce" rating for Lloyd's fellow part-nationalised operator Royal Bank of Scotland (RBS) but has lifted RBS's target price from 31p to 41p.Barclays is cut to "neutral" with the price target slashed to 300p from 425p on concerns that the valuation "is likely to remain capped by the business mix and associated regulatory risk."Among the Far Eastern banks it prefers Standard Chartered, which it rates a "buy", to HSBC, which is has downgraded to "neutral". HSBC's price target has been cut to 725p from 800p.Although HSBC shares have appeal for the defensive investor, the shares have had a good run recently and should not be chased higher at present, though an increase in US interest rates could change that scenario, as it would benefit deposit margins.