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Why everyone is excited about Lloyds shares again
New global banking rules look set to be watered down, adding to the reasons to buy Lloyds, say analysts.
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More FTSE charts & pricesby Deborah Hyde on Jul 28, 2010 at 10:33
Banks have persuaded the authorities to water down plans to make them hold more cash sparking a new confidence in the sector with analysts saying Lloyds is set to benefit the most.
Gareth Evans, strategist at Deutsche Bank, said the announcement late on Monday from the Basel Committee on Banking Supervision is 'the news we’ve all been waiting for' while Arturio de Frias Marques of Evolution said this may mark a 'turning point'.
After much industry lobbying the committee agreed to delay planned new rules that would have meant many banks would need to source more funding, which they argued would hinder their ability to lend and increase the cost of borrowing for customers.
'After years of underperformance, and with most investors still underweight, a relaxation of capital and funding concerns, combined with successful (albeit too soft) stress tests, could mark the change in the trend,' Marques said.
The strategy team at Deutsche Bank has upgraded the banking sector to 'neutral' from 'underweight', a position it has held since December 2009.
In that time banks have underperformed but Evans thinks with the stress tests out of the way and the Basel Committee coming through with a less stringent set of recommendations the bank sector 'now looks ripe for a sustainable recovery.'
Lloyds
Deutsche banking analyst Jason Napier's top pick is Lloyds which he says is well funded and well placed to benefit from the good returns in the UK retail market.
He also believes Lloyds will benefit even more than the other UK banks from the watered down proposals.
'These significantly reduce pressure on banks to hoard capital and cut bank demand for expensive term funding, supporting credit creation and margins. LBG is most positively geared, in our view,' he said, calculating the new rules mean the group needs to raise £120-130 billion less in the markets.
Marques also has Lloyds on his core buy list.
He thinks the shares offer 32% upside to his target price of 95p - higher than the European stocks on his core buy list and well above the average of 15% he sees across the sector.
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7 comments so far. Why not have your say?
Chris Marsden
Jul 28, 2010 at 11:21
So why Lloyds?
Today on IG Index at 11.20am
Lloyds - 2.43%
Barclays - .19
HSBC + .81%
report thisjoe stalin
Jul 28, 2010 at 12:27
Shutting the stable door was always going to be a dangerous exercise wrt to the banks Basel 3 is not conducive to creating the stability within banking that we need to continue on an economic recovery. In time asset prices will recover further materially improving tier 1 ratios. LLOY has always maintained that HBOS made commercial sense I am sure that it will and LLOY will become a colossus. I have long said that this is an opportunity of a life time to get in at a ridiculous price, The analysts are now beginning to come out of hiding- why wait until the squid and other prop desks have finished loading up before getting in.
report thisJohnyCash
Jul 28, 2010 at 12:56
Q2 Results due next Wednesday. I recall one analyst stating 'fair value' at 114p. Interesting times ahead...
report thisAnonymous 1 needed this 'off the record'
Jul 28, 2010 at 13:08
Form USA banks experiance, when the govermnet will start seling LLOY shares
the price will fall back.
report thisDavid Evershed
Jul 28, 2010 at 13:51
Banks are lending at a margin above base rate of 0.5% but they are having to pay well over base rate to raise deposits.
Hence interest rate margins are squeezed.
Only when bank base rate goes back above the inflation rate will bank margins begin to return to normal - and evn then it will take years to take effect.
report thisVictor Meldrew
Jul 28, 2010 at 22:00
What I've read, and please correct if this is wrong, is that banks have been able to borrow cheap and lend at a high margin. The regulations mean it isn't easy to set up as a bank in the UK, so banks can pay pathetic rates on cash ISAs for instance due to the lack of competition.
I would have thought that being able to hold less cash makes them pro-cyclical rather than more profitable in all conditions. If so, if that is exciting it indicates an appetite for risk. I can't say it's got me especially excited.
report thisthe Mekon
Aug 01, 2010 at 20:00
HSBC's internal processes were a lot slicker than Lloyd's. Try operating accounts under each banner. They should have gone for best of breed in the merge/takeover but they did not. A pity that 2nd best is thought of as good. If Lloyds management doesn't know that and act on it, they can't be top drawer.
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