Market Report: Lloyds in focus on hopes of strong capital buffers
Wednesday 22 September 2010
Lloyds Banking Group was in focus as traders studied forecasts of strong capital buffers last night.
Deutsche Bank said that, on the basis of the Basel II banking capital rules, Lloyds' buffer against unexpected losses – the so-called core tier one capital ratio – was on course to stand at 14.3 per cent in 2013. Crucially, even if the recently agreed Basel III norms are fully implemented, the bank is likely to boast about £10bn of surplus capital by that time.
"We expect the bank to produce more capital than it can deploy, having to grow loans by 17 per cent more than we forecast in order to hold capital ratios flat after forecast dividends," Deutsche explained, revising its target for the stock to 100p from 90p. Lloyds touched a high of 79.15p before relaxing to close at 76.9p, down 0.5p. Lloyds was also the subject of some comment from Goldman Sachs, whose analysts upped their target to 106p from 97p.
Goldman said that while chief executive Eric Daniels's decision to retire next year should been seen "as business as usual", it did "reflect Lloyds's significant progress towards normality", a process which has also encompassed the integration of HBOS, the strengthening of the capital base and the restructuring of the loan book.
Overall, the markets fell back, with the FTSE 100 easing by 26.35 points to 5,576.19 and FTSE 250 losing 3.12 points to 10,545.07.
All eyes were on the US Federal Reserve, which was due to issue a post-meeting policy statement after the close of business in London. Traders were divided on whether the American central bank would signal the need for further moves to increase the money supply, with most economists expecting the assembled policymakers to decided against taking any action at this stage.
A nod in the direction of further stimulus is expected to weigh on the dollar, which in turn is likely to drive gains on the commodity markets. Ahead of the meeting, profit-taking weighed on the mining sector as investors awaited further clarity on the course of US monetary policy. As a result, the likes of Lonmin, Anglo American and Antofagasta ended the session on a negative note, falling by 18p to 1,672p, 17p to 2,529.5p and 12p to 1,177p respectively. Vedanta Resources bucked the trend, however, and claimed pole position on the FTSE 100 with a 49p gain to 2,202p.
On the downside, the British Gas owner Centrica gave back 7p to close at 334p amid speculation that it could step in the way of GDF Suez's plans to take control of International Power, which gained 1.8p to 388.6p. The rumours, which suggested that Centrica was mulling a counter bid, were thin on detail, and failed to gain much traction. Though lower, Centrica's shares were in step with the trend in the wider market. Elsewhere, oil services stocks attracted buyers following confirmation of bid interest in Wellstream, the flexible pipes specialist whose shares rallied by nearly 30 per cent, or 176p, to 785p after it announced the receipt of several approaches.
The gains, partly pinned on short covering, boosted the mood across the wider sector, with Wood Group swelling by 25.6p to 416.2p and Hunting, which was mentioned as a possible bidder for Wellstream earlier in the week, gaining 19p to 641.5p.
Further afield, publishing and events group Informa was 3.6 per cent, or 15.4p, behind at 412.1p after JP Morgan Cazenove published a wide-ranging media sector round-up, lowering the stock to "neutral" on valuation grounds. The broker was more positive on ITV. The broadcaster rose by 0.75p to 58.5p after being upped to "overweight" from "neutral".
"We believe that new ITV management is likely to keep costs under control and positive surprises on advertising revenues are likely to boost earnings per share momentum," JP Morgan said, adding the stock to its European "analyst conviction list".
Also on the upside, the emerging markets fund manager Ashmore, which cheered investors with a well-received set of full-year figures earlier this month, was 3.5p better off at 324.5p after KBC Peel Hunt upped its profit forecasts for 2011 by 12 per cent.
"To us, Ashmore seems well positioned take advantage of the increasing amount of assets being allocated to emerging market[s] product[s]. Investors are increasingly looking to diversify from developed economics and Ashmore has broadened its product range to offer clients more specific options," the broker said, upping its recommendation to "buy".
Turning to the rumour mill, and speculators were lining up the soap and shampoo manufacturer PZ Cussons as a potential target.
A bid of more than 400p, and possibly as much as 450p, was rumoured to be in the works. And although there were no clues about the identity of the suitor, the chatter proved potent enough to boost the company's shares by more than 10 per cent, or 35.1p, to 382.2p.
Takeover rumours were also evident around GKN, the aeroplane and car-parts manufacturer. The stock failed to respond, however, with GKN closing slightly lower at 167.6p, down 0.8p last night.
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