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UK banks: Turning the corner

- "UK banks are benefiting from a combination of declining impairments, rising margins and strengthened capital bases. The domestic banks are trading on valuations at or below book value. In the past, UK banking has proved a profitable industry and could be expected to be so again, as long as economic recovery continues, even if future returns are well below those achieved in the past cycle. Compared with European banks, UK groups are also likely to have relatively limited exposure to southern European markets. We therefore expect the UK banks to continue to perform positively in a sector context. Against the market as a whole, banks are likely to continue to be geared towards perceptions of economic recovery. Downside in UK banks appears to require a double-dip scenario."
• "We are raising our rating on Lloyds to Buy and target price to 80p from 53p, and it is now our preferred domestic UK banking name. Lloyds is particularly geared to the theme of domestic margin expansion owing to the repricing of mortgage asset yields and short-term wholesale funding. In addition, we believe that balance sheet restructuring will eliminate the double leverage of the capital deployed in the life insurance business by 2012, allowing it to be more highly valued in the group valuation. We prefer Lloyds to RBS, on which we retain our Reduce recommendation, but raise our target price to 41p from 31p. Both groups are geared to credit trends and to wholesale funding rates. However, we believe that Lloyds is capable of achieving an attractive normalised RoE, whereas we are more cautious towards the achievable profitability at RBS."
• "We cut our Barclays recommendation to Neutral and reduce our target price to 300p from 425p. Although the group may report respectable profits by peer group standards, we believe the valuation is likely to remain capped by the business mix and associated regulatory risk."
• "Among the Far Eastern banks we continue to prefer Standard Chartered and retain our buy recommendation. We cut our HSBC recommendation to Neutral, and reduce our target price to 725p from 800p. The shares have outperformed the European bank sector in the recent correction. Although they retain defensive attractions, we see the main upside catalyst as increases in US interest rates, which would benefit deposit margins."
• "This note includes our projections for balance sheet trends, including asset quality, capital and liquidity, in addition to an analysis of current profitability drivers and our estimates for normalised earnings."
Nomura UK Banks 20100625

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