HSBC has upgraded its rating for Lloyds Banking Group PLC (LON:LLOY) to ‘buy’ in a review of UK lenders which concludes that “the market has been right to re-think its initial negative view on Brexit.”
In a note to clients, the bank’s analysts noted that, in the week following last June’s shock EU Membership Referendum result, the “combined market capitalisation of Barclays, Lloyds and RBS collapsed from £112bn to a low point of £74bn, but by year end it was almost back to the starting point.”
They added that “long-term rates are back to their pre-referendum levels helping to maintain hedge income and there has been no evidence of credit quality deterioration.”
The HSBC analysts said that, on one hand, this suggests the UK may have successfully navigated the storm, although on the other hand, it may be that the calm before the storm has persisted longer than anticipated.
They added: “Which-ever view ultimately proves correct, the consequences of Brexit for UK banks now look very different from what they did last summer.”
Adequately capitalised ….
The analysts noted that UK regulators see the sector as adequately capitalised, which means, in consequence, organically generated equity becomes available for dividends.
They pointed out that Lloyds has already reached this point, which implies underlying dividend capacity is well in excess of the 3p the group is likely to pay for 2016.
In light of this factor, the analysts have updated their valuations and hiked their target price for the part-taxpayer owned lender to 75p from 60p, leading them to upgrade their rating to ‘buy’ from ‘hold’.
In mid morning trading, Lloyds shares on the FTSE 100 index edged up 0.8%, or 0.54p at 66.39p.
Barclays still favourite …
The bank also raised its target price for peer Barclays PLC (LON:BARC) to 260p from 250p, reiterating a ‘buy’ rating on the firm, which is one of its ‘HSBC Europe Super Ten’ stocks.
Barclays shares gained 1.3%, or 2.95p at 231.8p.
HSBC also upped its target price for Royal Bank of Scotland Group PLC (LON:RBS) to 210p from 160p but retained a ‘reduce’ rating on the majority-state owned lender.
The analysts said: “The profitability of RBS continues to lag peers. The highly uncertain outcome of US litigation and fines remains the main focus of interest.”
Shares in RBS lost 0.6%, or 1.3p at 227.2p.