Broker snap: Morgan Stanley upgrades Lloyds on housing and payout potential

9th Aug 2013 09:31

Morgan Stanley has raised its rating for UK banking group Lloyds from 'equalweight' to 'overweight', saying that the company can benefit from a strong housing market while visibility on its payout improves."We upgrade Lloyds to OW as we are more bullish than most on the outlook for UK housing, while expecting a faster capital build and potential to re-rate as dividends are reinstated," the broker said."We raise 2015 earnings per share by 10%, and Lloyds is now our UK top pick."Morgan Stanley said it is already seeing good evidence of a bright UK housing outlook and expects to see higher loan volumes as demand picks up, helped by the government's 'Help to Buy' scheme. Meanwhile, it said that its estimates reflect "continued benign asset quality", as well as a potential capital benefit"as probability of defaults (PDs) and loss given defaults (LGDs) fall on existing books.The broker reckons that Lloyds is on the road to becoming a "yield play" and a "potential core holding for income funds" as its payout ratio (dividends as a percentage of earnings) should be above 70% as it returns to dividend payments in the future.Morgan Stanley has raised its target price for the stock from 70p to 93p.The share price was up 0.58% at 74.45p by 09:33.BC