Broker snap: Lloyds preferred to RBS at Nomura

8th Nov 2010 13:16

Nomura has kept its cautious 'reduce' stance on Royal Bank of Scotland, with the broker preferring rival Lloyds.The broker estimates RBS's third quarter underlying pre-tax profit was about £1.8bn, which equates to annualised earnings per share of 4.4p and a normalised P/E ratio of 10.RBS has a target of 15% return on equity, which would imply EPS of nearer 7.5p, but its plans to get there need more supportive economic conditions and interest rate levels, says Nomura, which has a price target of 41p for RBS shares. "To show value the group either needs to improve core business profits further, or have surplus capital", the broker says.Lloyds, however, doesn't require margin or pre-impairment profit gain to show value, Nomura argues, and has "higher gearing" to improved return on equity in the UK bank sector and "lower exposure" to investment banking problems.