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A leaner, meaner Lloyds gains City favour
Though some still say Lloyds Banking Group is 'uninvestable', City analysts are warming to the downtrodden shares.
Taxpayers may have long ago made their minds up, but government-rescued Lloyds Banking Group (LLOY.L) still divides the City.
Analysts who cover the shares face-off from two extremes. Some trash Lloyds, say it is still ‘uninvestable’. Others are warming to the stock; Goldman Sachs yesterday even predicted the share price – trading at 10% of what it was at a 2007 peak – could double in the space of a year.
For Goldmans and a growing number of analysts the shares are a ‘buy’. Under chief executive António Horta-Osório, the bank is turning a corner and starting, finally, to wrench its balance sheet into shape, such analysts say.
Ship-shape in no time...
Why? Partly because the European Commission, British government and Bank of England have taken measures that could ultimately make the bank leaner and meaner – or more ‘Lloyds-like’ as Credit Suisse analysts have put it.
The sale of branches to Co-op, agreed today, was forced through by the European Commission. The sale disappointed the analysts who rate the bank as an obvious ‘sell’, but for others it’s a step close to restructuring and removes another layer of uncertainty.
Then there is the government’s efforts at banking reform. Though forcing substantial costs on the industry, they are seen as watering down proposals made by the Independent Commission on Banking – to the tune of a 40% reduction in costs according to Goldman Sachs’ analysis. Lloyds, say the Goldman Sachs analysts, is well-placed to mitigate the impact of reforms; Barclays (BARC.L) and RBS (RBS.L) aren't.
Cheaper funding for Lloyds
The Bank of England’s new funding for lending scheme – designed to cut British banks’ borrowing costs and get them lending – is what really tickles the optimists though, after the details of the scheme were outlined on Friday.
Analysts are in general cheerful on the prospects for the lending programme, with Lloyds in particular set to reap some juicy rewards.
Bank watchers at UBS reckon Lloyds’ net interest margin, a measure of profitability, could be enhanced by six basis points, while pre-tax profits could be boosted by some 5%. ‘These are not huge figures, but linked to a likely positive inflection in volumes, would underpin the long-awaited turnaround in top-line and bottom-line growth at the bank,’ they say, and stand by their buy rating for Lloyds, RBS and Barclays shares.
Too much of a gamble for some
Analysts at Nomura agree that Lloyds looks set to benefit the most from the funding scheme, while the bank will also be less impacted by the Libor rate-rigging scandal than other banks; contrary to sharp losses for Barclays, Lloyds shares are slightly higher since the Libor scandal news broke.
But beyond these short-term boosts, they say that Lloyds faces a tougher future than other domestic UK banks. It is after all particularly dependent on risky wholesale markets for its funding, as well as struggling UK businesses and customers for its profits.
In fact, all domestically-focused UK banks – excluding global HSBC (HSBA.L) and emerging markets focused Standard Chartered (STAN.L) – are uninvestable according to Nomura, as they face the uncertain fallout from the Libor scandal, restructuring and tough regulatory requirements. Other brokers say these risks are simply over-stated; Lloyds' share price 'discounts an overly pessimistic credit outlook', concluded Oriel analysts yesterday, in a note yesterday reiterating their buy rating and increasing their target price from 45p to 49p.
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- Lloyds Banking Group PLC (LLOY.L)
- HSBC Holdings PLC (HSBA.L)
- Barclays PLC (BARC.L)
- Royal Bank of Scotland Group PLC (RBS.L)
- Standard Chartered PLC (STAN.L)
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