Brokers back Lloyds Banking Group and RBS |
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| Economy | |
| Written by Roberta Murray | |
| Thursday, 04 February 2010 | |
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Lloyds Banking Group and RBS are past the worst say top analysts.
Lloyds Banking Group (LON:LLOY) and RBS (LON:RBS) - the two UK banks with significant tax payer interests - have received the backing of a number of high profile analysts. Despite a new found confidence in the health of RBS and Lloyds, the markets appear not to have taken much interest as both banks are down by over 2% in morning trade on the FTSE 100. Despite the blip, things are looking brighter: "We think bad debts peaked in 2009 and that the funding markets can continue to improve. This is not in consensus. While BIS will add to volatility, in our view it is a dividend issue not a dilution issue. As confidence about the book value and return on net asset value grows in 2010 share prices should re-rate materially - we have an average of over 40% upside to our 12-month price objectives, but think the sector can more than double over the next few years," says Helsby. However Guardian columnist Nick Fletcher is quick to point out that there is still a differing consensus on the issue. Credit rating agency Moody's and the IMF have both suggested bad debts were not likely to peak until 2010. Jonathon Pierce, an analyst at Credit Suisse, believe the BIS rules on capital requirements could lead to more fund raising by banks. Nevertheless, here are the broker ratings issued by Helsby and his team at Bank of America: RBS"Reinstate as a buy, price target 45p. RBS is one of the European banks that is most geared to a recovery in the global economy and credit markets. The credit outlook appears materially better than even three months ago and we think RBS presents an opportunity, a view supported by the bullish stance of our economics and credit strategy teams. "Achieving a smooth integration of ABN's operations alongside a run-off of the £200bn non-core book is clearly a complex task. If we add to this mix the ongoing uncertainties about the sustainability of a UK economic recovery, political involvement from the major shareholder and the lack of clarity on the future regulation and control of universal banks, then it is easy to see why investors might avoid the shares, but herein lies the opportunity, in our view." Lloyds Banking Group"Reinstate as a buy, price target 80p.The main market concerns surrounding Lloyds remain bad debt and funding, but we think quicker-than-expected progress is being made on both fronts. We are £3bn above the 2010 estimate pretax profit consensus and think the group can achieve a 15% return on net asset value by 2012. We do not think this is in the price. The funding environment has changed materially in the last six months. Funding markets are now open. This is key, as it will remove structural pressures on deposits. Together with a modest pick-up in base rates, this should pave the way for a recovery in deposit spreads and net interest margins."
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