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Broker snap: Steer clear of banks
Wed, 19 Nov 2008, 11:42:00
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Related Market Prices
Name
Value
Percent
Change
Lloyds TSB Group
130.00p
+3.17%
Barclays
157.00p
+2.35%
HBOS
72.50p
+5.07%
HSBC Holdings
682.00p
+3.02%
Royal Bank of Scotland Group
52.50p
+6.28%
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Banking profitability will not be the same for a long while, according to JP Morgan, which has issued a downbeat assessment of the prospects for UK banks.<br /><br />JP Morgan (JPM) is sceptical over the government's assurances that it will be an "arm's length investor" and believes that "as the economy deteriorates the government is likely to be pressed to exert more influence."<br /><br />In short, the US bank believes the government's primary concern will be to "keep the UK consumer alive".<br /><br />Though JPM confesses it does not know what impact the government's involvement will have on earnings, it is assuming that there will be less significant margin growth in the low interest rate environment, while the fixed cost of writing business will be more expensive.<br /><br />The US bank has cut its earnings estimates for the UK banking sector by 31% for 2009 and by 34% in 2010. It expects sector Return on Equity to fall in the range of 6-10%.<br /><br />"Post the £35bn of ordinary equity being raised. we still project a £20bn deficit although we expect banks to be allowed to operate with that deficit as long as it is encapsulated within Pillar 2," JPM said, while continuing to advocate a "good bank, bad bank" type structure in which the toxic investments are hived off. JPM believes such a structure "would reduce the risk of rising impairments on equity, improve wholesale funding and make the system investable once again."<br /><br />JP Morgan remains underweight on the sector and has reduced its price targets for the major players as follows: post-merger <b>Lloyds Banking</b> from 180p to 110p (pro-forma); <b>Barclays</b> (from 210p to 150p), <b>Royal Bank of Scotland</b> (from 120p to 50p) and <b>HSBC</b> (from 720p to 675p). <br /><br /><b>Lloyds TSB</b> remains its least preferred stock in the sector, with <b>HSBC</b> the best of a bad bunch. JP Morgan believes the synergy targets after the Lloyds TSB and HBOS merger will be hard to achieve and capital shortages remain. The possibility of <b>HBOS</b> continuing as an independent entity is discounted, as the cost of preference capital and government debts guarantees, combined with rising impairments, would wipe out profitability.<br /><br />Lloyds TSB shareholders meet Wednesday to vote on the proposed merger with HBOS having been warned on Tuesday by Chancellor Alistair Darling that if does not go through, Lloyds will have to pay a lot more to borrow money from the government.<br /><br />Meanwhile Broker Panmure Gordon has also been sticking the boot into <b>HSBC</b>, dropping its rating from "neutral" to "sell" and scything its price target from 810p to 615p in recognition of the worsening global economic outlook. The broker observes that although it has avoided the need to ask for a government hand-out, its Tier 1 capital ratio has eased to 8.9%, which is below the 10% average for the European banking industry.
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