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Lloyds rated 'buy' at UBS despite its results failing to ignite shares

Published: 10:59 18 Aug 2017 BST

Lloyds Bank branch
Lloyds and Barclays were handed 'buy' ratings by broker UBS

Swiss broker UBS has repeated a 'buy' on UK-focused Lloyds Banking Group (LON:LLOY) after a 'decent' quarterly earnings beat across the UK bank sector.

He upbeat stance comes despite UBS’s concerns over the wider UK economy ahead.

In an expansive note, UBS analyst Jason Napier notes that second quarter numbers for UK banks beat market consensus by 13%, despite the focus of headlines being, as ever, PPI compensation details.

Income was 3% better across the sector, though partially offset by provision costs, while better credit quality and a lowering of bad debts  led to  far better pre-tax profits, he notes.

Lloyds specifically, in its first results since returning to private hands in May,  posted pre-tax profit of £2.5bn for the six months to 30 June, up 4% on the previous year. The interim divi was also  lifted to 1p per share, compared to 0.85p the same time a year ago.

That said, none of this, or the upgraded earnings estimates UBS sUBSequently forecast, translated into a catalyst for the shares, points out the analyst.

Investors are  clearly not seeing near term earnings beats as a catalyst for a re-rating - bad news for the bank bulls,  says Napier.

For example, Lloyds shares stand at around 63p today compared to 67.50p - the day the results came out.

Barclays (LON:BARC) meanwhile, also rated 'buy' at UBS, has its shares at 194p today  - compared to over 205p the day of its interims.

These are the two bank stocks that UBS prefers, notwithstanding potential headwinds to the UK economy

 "HSBC and Stanchart will need to deliver, we think, strong pre-provision profit performances in the coming quarters to sustain their valuations we think," said Napier, who hands a 'neutral' rating to both.

For all banks the end to the Bank of England's cheap money in the form of term funding in February next year will be key, says UBS.

For Lloyd s that could spell the end of its cheap mortgages, suggests Napier.

For Barclays, looking ahead, the analyst reckons falling costs will allow a normalisation of profits even as credit falters and margins fall.

And for Lloyds, he reckons its wiggle room available for it to cut its deposit costs (0.60% in 2016) and hold costs down will allow for stable EPS (earnings per share) and higher payouts to persist despite the weaker UK.

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