Investec Bullish on Lloyds and Standard Chartered

Investec Bullish on Lloyds and Standard Chartered

Lloyds took most of the hit for payment protection insurance costs

According to Investec, Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY)’s stock price already discounted mounting regulation costs. The main cost for Lloyds was payment protection insurance (PPI) fines set aside to pay customers for misrepresentation of PPI done to obtain sales. Lloyds has already set aside 9.8 billion pounds for such fines. Ian Gordon, an Investec analyst, thinks that such provision is barely sufficient in his base case scenario. He sees a small impact to Lloyds, measured in hundreds of millions, should additional needs for PPI provision arise. Risks to base case scenario include U.S. regulator focus on monitoring foreign bank activity and imposing fines and U.K. regulator potential restrictions on what counts as a risk weighted asset (RWA). Price target for Lloyds is 85 pounds, implying a 21% gain over the next 12 months.

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Better second half outlook for Stardard Chartered

Ian Gordon from Investec acknowledges that results from the first half of 2014 were disappointing. There was no growth in corporate finance and costs increased by about 1% in the face of declining revenues. Foreign exchange profits were lower than expected as well. Gordon believes Standard Chartered PLC (LON:STAN) may deliver better results in the second half of this year underpinned by a lower effective tax rate, strong capital position and ability to maintain its 0.288 pound per share dividend. Gordon sees a rebound in corporate finance profits driven by a strong deal pipeline and foreign exchange movements support revenue growth. Gordon believes Standard Chartered offers best return on equity potential in the sector between 11.4% and 11.9%. He has a price target of 1450 pounds, changed from a prior 1600 pounds. Gordon’s target price implies a 25% return over the next 12 months.

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Royal Bank of Scotland downside limited

Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) (LON:RBS)’s stock price has lost 14.5% in the past 6 months and 6.6% year to date as of July 14. Ian Gordon from Investec thinks that most of the downside is behind the stock. Even though Royal Bank of Scotland is poised to deliver negative to flat return on equity until 2016, the stock is trading at 0.75 price to tangible book value relative to the industry’s 3.21. Gordon believes RBS could surprise to the upside if rates in the U.K. or the U.S. move. Because the bank has more leverage than its peers, its spreads will widen more with a rate increase. Also, Royal Bank of Scotland’s restructuring efforts will strengthen its capital base and Gordon forecasts a core tier 1 capital ratio of 13.6 for 2016. Gordon has a target price of 325 pounds for RBS, which implies a 2.8% gain over the next 12 months. He upgraded the stock from sell to hold.

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