Market Report: Bullish broker helps Lloyds to stand firm

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The Independent Online

Words of support from a leading broker kept Lloyds Banking Group, up just over 1 per cent or 0.7p at 70p, on a firm footing last night.

UBS weighed in, saying that the bank's capital cushion and its participation in the Government's asset protection scheme (APS) meant that it was better placed to withstand a greater degree of credit stress than its peers. Moreover, APS participation will ensure that Lloyds' impairment charges are more likely to be "V" shaped than elsewhere, "and that rising impairment at Lloyds is an issue that should not ultimately concern the market," the broker said, reiterating its "buy" stance on the stock.

UBS also tackled the issue of margins, which have evoked concern in parts of the market. The broker said the worries were largely short-term issues, "reflecting the cost of terming out the balance sheet and repricing deposits". "We expect the margin to stabilise as asset repricing begins to offset deposit pressure in 2010."

Traders added that, beside the UBS note, Lloyds was also being supported by the buying pressure induced by a reweighting, due to take effect at the start of trading on Monday.

Overall, traders were complaining of another quiet, if somewhat volatile session, as the week drew to a close, with the FTSE 100 climbing to 4,345.93, up 65.07 points, and the FTSE 250 gaining 122.36 points to 7,364.03. Much of the move up – and the volatility – was attributed to "triple witching", as stock and index options, and index futures, expired.

Insurance issues were generally firm, with Aviva rising to 336.75p, up 5.8 per cent or 18.5p, after Deutsche Bank upped its target price for the stock to 385p from 350p in a new European insurance sector review. "We think there is reasonable value in the sector presently and even adjusting for capital and time to recovery of earnings, insurers are trading 7.2 times our normalised earnings, which is inexpensive," the broker said, highlighting Old Mutual, which was more than 2 per cent or 1.8p higher at 75.2p, as one of the stocks that looked cheap at the smaller end of the sector.

Elsewhere, BSkyB advanced to 443.75p, up almost 3 per cent or 12.75p, thanks to UBS, which issued a "buy" note on the stock, arguing that the share price weakness engendered by regulatory fears had opened up a buying opportunity. UBS also raised its target for Sky, to 640p from 525p.

"We downgraded Sky to neutral earlier this year, highlighting the scope for a better buying opportunity to emerge ahead of Ofcom's next consultation into the pay TV market review," the broker said. "With 25 per cent underperformance versus that market over the past three months, we believe such an opportunity has arisen. Our scenario analysis suggests that a significant regulatory discount is already reflected in the price, and that the risk/reward profile is skewed to the upside."

Firmer oil prices supported Royal Dutch Shell, up just over 2 per cent or 32p at 1,591p, and BG, up almost 4 per cent or 39p at 1,066p. The mining sector also fared well, with Lonmin climbing to 1,250p, up 5.6 per cent or 66p, Kazakhmys advancing to 637.5p, up 2.7 per cent or 17p, and Vedanta Resources rising to 1,422p, up 2.8 per cent or 38p. Elsewhere in the sector, Eurasian Natural Resources Corporation rose 1.5 per cent or 9.5p to 642p, while Rio Tinto was up 2.2 per cent or 46p to 2,095p.

On the second tier, the housebuilder Taylor Wimpey, which it had "seen continued stability in the UK housing market" since reporting full-year results in April, was among the best performers of the day, advancing to 34p, up almost 10 per cent or 3p, as investors bought in on hopes of a recovery. Panmure Gordon, which maintains a "hold" rating on the company's shares, remained cautious, however, saying that although the update was upbeat in tone, it was "unsurprising given that comments from Taylor Wimpey regarding the UK market have been a little more positive than others".

"Although the market may take confidence from today's statement, we believe it is too early to predict a sustained recovery in market conditions," the broker said. "Furthermore, we believe that the statement contrasts with a more cautious outlook by Bellway a couple of weeks ago."

The market did indeed take heart from the update: the wider sector was buoyant, with Barratt Developments climbing to 153.5p, up 7 per cent or 10p.

Also on the upside, WS Atkins was almost 7 per cent or 36.5p higher at 582.5p after Goldman Sachs moved its target price for the stock to 840p from 825p, on account of the company's full-year results, which were released earlier this week.

"While growth in the rail segment and the Middle East operations are likely to remain weak in the near term, in our view, the company is well positioned to increase energy and climate change-related revenues going forward," Goldmans said, reiterating its "buy" stance on the shares.

On the downside, Mouchel, the consulting and business services group which dropped almost 33 per cent on Thursday after warning on current year performance, fell another 3.2 per cent or 5p at 152.5p.