Broker snap: Nomura uneasy about BarCap

10th Nov 2010 12:43

Nomura expects the investment analyst community to downgrade earnings projectionss for Barclays after the banking giant's trading update on Tuesday."We view consensus for fiscal year 2010 and 2011 as too optimistic", says analyst Robert Law. "We estimate £5.35bn for 2010, against a consensus of £5.8bn and have £6.8bn for 2011, against £7.6bn."Performance in the UK traditional banking business was ahead of estimates "with further recovery expected". However, group pre-tax profit was in line, "due to Barclays Capital (BarCap) and losses from its international banking businesses", Law said.The group reassured investors that it can meet the stricter Basel III capital requirement rules without recourse to an equity issue, but the broker remains concerned about BarCap, which still represents 60% of the pro forma group risk-weighted assets.Investors looking for exposure to the UK banking sector are advised by Nomura to take a look at Lloyds Banking Group, as it looks more geared to any recovery in domestic banking, "without regulatory overhang from a capital markets business".Nomura sees only a modest recovery in the shares short term and regards any re-rating as capped until the market is more convinced that the group can achieve an attractive RoE at BarCap and at the group level."We estimate the current BarCap RoE [(return on equity)] would be 10-12% on £30bn of equity and project a normalised group RoE of 10% in 2012."The broker reiterates a 'neutral' rating and a target price of 300p.