Lloyds Banking 'buyu' case remains for Nomura despite ECN bond court judgement

3rd Jun 2015 16:28

Lloyds Banking Group remained a 'buy' in the view of Nomura on Wednesday despite the bank being prevented by the High Court from buying back a pool of high-interest, enhanced capital note (ECN) bonds.The Japanese broker said the "bizarre" court ruling, which came after the Bank of England's Prudential Regulation Authority (PRA) had allowed the redemption, does not change the investment case on Lloyds, though it will result in the bank's net interest margin (NIM) being reduced by four basis points (bps) unless an appeal is successful.The analysts said as it stands, their NIM estimate has been reduced from 273bps in 2017 to 269bps, all else equal."This does not really change our investment case because Lloyds has other ways to recoup this 4bps NIM that it seems to have lost for the moment."Nomura said it believed the onus was now on the PRA to say that ECNs will not be eligible in future stress tests, unless Lloyds sucessfully appeals the court's judgement.Though some negotiations with the PRA would probably be necessary, Nomura noted that Lloyds would not be looking to redeem these instruments in the first place if it did not have permission from the PRA."Lloyds may have to issue some AT1/T2 [Additional Tier 1 and Tier 2 bonds] against the £3.3bn ECNs it has outstanding, reducing some of the NIM upside."However, we think NIM upside remains; it is a matter of timing."Either way, Nomura felt it was unlikely to materially change its expectations.