By Angus Robertson
UK banks are in the spotlight due to their exposure to Irish debt, but at least one analyst sees the recent price dip as a buying opportunity.
Since a recent peak in mid-September, Royal Bank of Scotland Group (NYSE:RBS) has fallen from 50p to around 41p, Barclays (NYSE:BCS) from 20p to near 16p and Lloyds Banking Group (NYSE:LYG) from 78p to 64p.
Arturo de Frias, head of banks research at Evolution Securities, said in a note Monday: “The latest episode of acute Sovereign fears is creating a great buying opportunity in the banks sector.”
In mid-November Merrill Lynch analysts said: ‘The decline (in stock price) coincides with the increased fears surrounding Irish sovereign debt, which suggests to us that the market is effectively pricing in a materially worse scenario than currently expected by analysts.’
Analysts tracked by Alacra Pulse over the last 30 days are mixed on whether UK banks are worth taking a punt on. Royal Bank of Scotland Group was upgraded from Underperform to Neutral at Exane BNP Paribas, and from Neutral to Buy by UBS analysts last week. But Macquarie analysts downgraded the bank from Outperform to Neutral.
Analysts Robert Law and Raul Sinha at Nomura note that the bank’s profits before impairments came in better than their expectations, while impairments themselves of £1.95 billion were “£600 million better than our assumption and £500m down on [the second quarter].”
“Overall, the results looked better than expected. The group’s expansion in net interest margin was a positive and the loss from the non-core business was less than I had expected,” said Execution Noble analyst Joseph Dickerson.
Moody’s noted that RBS has met its funding needs for 2010 and by running down non-core assets will reduce future financing needs. However, “A slower reduction in non-core assets than planned and/or further disruptions in the wholesale funding markets would put pressure on the group’s funding profile over 2011–2012.”
But Bruce Packard, financial analyst at Seymour Pierce, said there were worrying signs over revenues. And Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, added it was clear RBS faced a “long hard slog” despite signs of optimism.
Investors looking for exposure to the UK banking sector are advised by Nomura to take a look at Lloyds Banking Group as it looks more geared to any recovery in domestic banking, “without regulatory overhang from a capital markets business”. Regarding Barclays, Nomura remains concerned about the impact of investment banking arm Barclays Capital, which still represents 60% of the pro forma group risk-weighted assets.
But Barclays’ capital ratio “is a lot better than people will expect and should be taken really well by the market,” according to Michael Helsby, an analyst at Bank of America Merrill Lynch , who has a Buy rating on the stock.
And Ian Gordon, an analyst at Exane BNP Paribas, kept his Outperform rating on Barclays, saying: “There’s life in the old dog yet!” He said the improved profitability was substantially driven by the better impairment picture. “A distinguishing benefit of having negligible exposure to Ireland,” he added.
In late October Credit Suisse cut its target price on Lloyds to 79p from 87p. Analyst Jonathan Pierce said falling property prices could have an impact and prospects for short-term capital return are limited. He thinks 2011-12 consensus revenue forecasts are 5% too high.
Charles Stanley analyst Nic Clarke remains concerned about “the negative impact that Ireland is having and despite good progress this year we believe the market still frets about the significant amount of wholesale funding that matures in the next couple of years and the potential impact that a weakening UK economy would have on Lloyds given its significant exposure to UK retail and commercial customers.”
And even the bullish de Frias sounds a note of caution: “I am not saying that this is the bottom: acute Sovereign fears can become extreme Sovereign fears before we reach the bottom.”
Sources: Alacra Pulse, Telegraph, thisismoney, American Banking News, Benzinga, Forbes, Reuters, The Scotsman, CityAM.