Broker Views: The UK banking sector

Analyst Peter Toeman at HSBC believes the market has been right to re-think its initial negative view on Brexit and the potential impact this could have for the UK banking sector and questions whether this could be the ‘calm after the storm’.

After the combined market capitalisation of Barclays (LON:BARC), Lloyds (LON:LLOY) and RBS (LON:RBS) collapsed from GBP112bn to a low point of GBP74bn, he highlighted that long-term rates are back to pre-referendum levels and there has been no evidence of credit quality deterioration.

In terms of Lloyds, Toeman said investors’ concern over margin attrition and deteriorating credit quality appears misplaced and has therefore lifted its target price to 75 pence a share (from 60 pence) and recommendation to buy from hold.

He also reckons the decision made by Barclays, a member of the HSBC Europe Super Ten list, to dispose of Non-Core activities is strongly value accretive and that the improved outlook for fixed income markets could be an important catalyst.

HSBC reaffirmed its buy rating on the shares and increased its target to 260 pence (from 250 pence), implying 17 per cent potential upside.

Meanwhile, RBS continues to lag peers.

“The highly uncertain outcome of US litigation and fines remains the main focus of interest,” Toeman added.

RBS was kept at reduce albeit the target was raised to 210 pence (from 160 pence).

David Lock, banks analyst at Deutsche, repeated his buy rating on Barclays in a preview note ahead of the upcoming results.

“We are positive on the shares and see Barclays as well positioned for 2017 given improved capital market conditions, favourable FX, potential opportunities for costs, and expect credit quality to remain robust,” Lock explained.

However, he was not so bullish over the outlook for sector peer Lloyds:

” We are c.3% ahead of company u/l cons for 4Q16 (income in line, costs and impairments lower).

“But with Lloyds trading at 11x 2018 EPS, 1.2x TNAV, for a 5-7% dividend and 10-12% RoTE we think the shares are trading at close to fair value (68p TP vs. 66p current price) and our 12m view remains Hold.”

At 3:03pm:

(LON:BARC) Barclays PLC share price was +1.1p at 229.95p

(LON:LLOY) Lloyds Banking Group PLC ORD share price was +0.4p at 66.25p

(LON:RBS) Royal Bank of Scotland Group The PLC share price was -2.9p at 225.6p

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