Nomura upgrades UK banks after recent underperformance; says Tory election win is more banking friendly

8th May 2015 09:48

Nomura upgraded UK bank stocks to overweight from underweight on Friday, pointing to their recent underperformance and the "business/banking friendly outcome" of the UK election, with the Conservative Party on track for another five years in power."When we downgraded the UK banks sub-sector at the start of the year, we were concerned about earnings momentum, litigation risk, regulatory headwinds and political risk," said Nomura.However, dividend expectations in the UK and Europe can gradually move higher as pressure to build capital eases, while political risk appears to have materially subsided as a result of the UK election outcome, Nomura said.It said that while a Tory victory is not in itself banking friendly, it's better for the banks than the alternatives. "Investors can breathe a sigh of relief that the status quo on banking policy is set to be maintained."Nomura said policymaker now have an opportunity to reverse in parts some of the more business-unfriendly policies like the UK bank levy on global operations. The main political risk looking ahead is a 'Brexit" but given that a referendum won't take place until 2017, Nomura has chosen to put the issue to one side and focus on current fundamentals.Nomura's top pick in the sector is Lloyds, with Barclays coming a close second. It noted that a Labour victory presented the biggest tail risk to Lloyds in the form of market share caps. Labour's suggested bank reforms had included a cap on the size of banks' market share to reduce their dominance in the market. "This overhang now appears to be out of the way," said Nomura.As far Barclays is concerned, the key catalyst in the coming months is the resolution of forex litigation.Nomura rates Barclays and Lloyds at buy.