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Broker spotlight: Optimism cooling on financial sector

Banking results season is imminent, prompting a few brokers to take stock.

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Most of the high street banks had their price targets trimmed by Deutsche

Goldman Sachs has been looking at the oil field support services sector and has been tweaking its price targets.

Petrofac (LON:PFC) and John Wood Group (LON:WG.) both see their targets move up, with the former now valued at 1,186p from 1,120p and the latter at 734p, up from 700p.

Petrofac remains on Goldman's “conviction buy” list but Wood merits no more than a neutral rating.

Amec Foster Wheeler (LON:AMFW) remains a 'buy' in Goldman's view, but the price target has been pared to 997p from 1,022p.

There has been plenty of broker focus on the financial sector, and little of it will be welcomed by holders of banking and insurance stocks.

Although general insurer Direct Line (LON:DLG) sees its price target lifted by Barclays Capital, it is only by a penny to 417p, which has no influence on the bank's 'overweight' recommendation.

BarCap cuts 20p from the price target of insurer Lancashire Holdings (LON:LRE), which is now valued at 419p with an 'underweight' rating.

BarCap sticks with an 'equal weight' rating for Standard Life (LON:SL.) but cuts the price target from 533p to 523p, while wealth manager St James's Place (LON:STJ) keeps its 'overweight' rating, even though BarCap has lopped 41p off the previous target price of 1,141p.

Meanwhile, German banking titan Deutsche Bank says it is not all bad news on the margins front for UK banks.

“Margins on new business remain below the back book; however, deposit costs have continued to fall, and new mortgage rates appear to have stabilised in recent months,” Deutsche asserts in a note that previews the third quarter results of the high street banks.

Deutsche has shaved 4p off the 310p price target of Barclays (LON:BARC), a penny off the 97p price target of Lloyds Banking (LON:LLOY) and 6p off the 355p target price of Royal Bank of Scotland (LON:RBS).

Berenberg takes a slightly more pessimistic view, albeit on all European banks rather than just the UK ones.

It says there may be trouble ahead.

“Most European banks’ emerging market exposures exceed their tangible equity; however, despite this summer’s volatility, valuations show few signs of reflecting risks from these markets. Based on past crises, we expect these risks to move into sharper focus as the effects of the strong dollar and weak commodity prices peak during 2016,” Berenberg said.

“While the crystallisation of emerging market risks will be negative for the sector, we see HSBC (LON:HSBA) and Standard Chartered (LON:STAN) emerging as relative winners, despite their exposures to Asia,” Berenberg added.

The same broker is responsible for one of the few rating changes in the slew of morning research notes as it upgrades software firm AVEVA (LON:AVV) to 'buy' from 'hold'.

“Our discussions with various interested parties have strengthened our view that the deal between AVEVA and Schneider will close. As such, we raise our price target to 2,450p [from 1,977p] based on a 7x EV [enterprise value]/recurring revenue multiple for the combined businesses,” the German bank said.

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