'Too much pessimism' over UK-focused banks, says Credit Suisse
Perceiving too much stock market pessimism about domestic UK banks, Credit Suisse upgraded Lloyds Banking Group and Royal Bank of Scotland but downgraded HSBC in a note on Tuesday.
The Swiss bank's base case for UK-focused high street banks is for 'soft Brexit', seeing an increasing likelihood that the transitional deal proposed by Theresa May and backed by Chancellor Philip Hammond becomes permanent.
"Our central scenario of low growth, low unemployment and moderate rate rises is supportive for domestic banks’ capital generation and we continue to believe earnings risk is to the upside."
Lloyds was raised to 'outperform' from 'neutral' and a share price of 80p is targeted, while RBS was lifted to a 'neutral' rating from 'underperform' and given a target price of 275p.
Barclays was kept on an 'outperform' rating as downgrades are believed to be reaching a trough and of the UK banks it is seen as most sensitive to US tax reform with a potential near-8% earnings per share benefit after a one-off capital impact from deferred-tax revaluations.
Lloyds, which has de-rated relative to UK peers in the year-to-date, is seen by CS analysts as a likely winner from 'soft Brexit'.
In spite of 2018 EPS consensus upgrades of 20% the shares have risen just a 9%, whereas international UK banks have re-rated on more modest earnings upgrades.
"We would expect this domestic UK risk-premium to reduce as 1) a softer Brexit becomes the market base case and 2) Lloyds’ earnings and capital generation remain supportive."
For RBS, Credit Suisse welcomed recent positive developments on the capital side, notably on IFRS 9, and said short-term momentum in the business looks strong.
"That said, we continue to see uncertainties in the timing of capital return, and risks (eg on pricing pressure) to its UK growth strategy."
HSBC was cut to 'underperform' from 'neutral' as analysts said the market was pricing in an optimistic scenario, with shares having outperformed domestic peers by circa 10% in 2017 yet earnings revisions have lagged by around 5% on average.
"However, we are more cautious on NIM expansion (timing and competition) and capital return (UK subsidiary deficit is broadly equivalent to US surplus)."
Standard Chartered was left on an 'underperform' rating as its current valuation of circa 15 times 2018 earnings is "too generous given the return outlook and ongoing uncertainty on top line growth".