Market Report: Lloyds shines on strength in retail banking market

Lloyds banking group continued to recover last night, firming up as traders bought in on the view that it was a better play on the UK market than its rvial Santander.

The credit crisis saw the two groups increase their reach across Britain's retail banking market by taking over distressed peers: Lloyds bought Halifax/ Bank of Scotland and Santander, which bought Abbey in 2004, acquired Alliance & Leicester and Bradford & Bingley's savings and branch network.

Yesterday, UBS said that while Santander was seen as better placed to grow, investors might be missing a trick because Lloyds enjoyed a bigger balance sheet. Moreover, while Lloyds has a higher proportion of riskier investments at the moment, that is likely to change as the bank pares down and gets rid of non-core assets.

"[Santander UK] has the smallest balance sheet of the top five UK banks, operates with about 11 per cent of the core tier-one capital employed by Lloyds, and has the lowest core tier-one ratio and highest leverage ratio of the peer group," UBS said. Its remarks helped Lloyds' share price to rise by 2.99p to 56.9p. The wider sector also gained ground, with Royal Bank of Scotland up 1.67p at 46.77p and Barclays up 11.9p at 308.9p as worries about Europe's debt woes were replaced by the feeling that leading stocks had been oversold in recent sessions.

Bargain-hunters aided the FTSE 100, which supplemented Wednesday's gains and closed more than 3 per cent, or 157.09 points, higher at 5,195.17. The FTSE 250 was in a similarly buoyant mood, gaining 2.7 per cent or 254.58 points to 9,647.25 as buyers waded back after China denied it was reviewing its holdings of European sovereign bonds. The Chinese central bank dismissed a report that it was meeting EU bankers amid concerns about its exposure to the eurozone's financial woes. Its statement boosted confidence in the single currency and calmed nerves across the financial markets.

"One of the markets' unspoken assumptions is that, effectively, the only alternative reserve currency to the US dollar is the euro," said Stephen Lewis, an economist at Monument Securities. "The currency composition of China's foreign exchange reserves is a closely-guarded secret but it is widely assumed that 65 per cent are held in US dollars, with most of the rest assumed to be invested in euro assets."

Meanwhile, insurance shares were in demand amid rumours that Prudential might abandon its gambit to acquire AIA, and thus scrap the mammoth cash call required to fund the deal. The company was quick to bat down the chatter, which a spokesman said was "unfounded". The share price, though off the day's highs, firmed up nonetheless, with the Pru closing with a gain of nearly 7 per cent, or 35p, at 547.5p.

Pru's sector peers Aviva and Legal & General were also strong, gaining 21.4p to 321.3p and 5.45p to 79.15p, respectively, after Nomura said they offered "remarkable value". The broker added: "We estimate that the potential release of surplus credit provisions could potentially boost both Aviva's and L&G's earnings significantly over the next few years." Nomura duly raised its target for Aviva from 603p to 619p, and for L&G from 135p to 143p.

Elsewhere, the Mexican silver miner Fresnillo was 40p stronger at 883p after Deutsche Bank advised investors to pile in. "We expect the gold price to continue its rally, peaking in 2012 at $1600 [per troy ounce]. Although the fundamentals are not as attractive, silver should be dragged up by gold's performance," the broker said, identifying Fresnillo as best placed to capitalise on this trend.

Marks & Spencer rose 6.8p to 344.9p after HSBC moved the retailer to "overweight", citing the affordable valuation but warning investors that there was little scope for consensus estimates to move higher in the short term. "In our view, there is a trading opportunity in the run up to new chief executive Marc Bolland's strategic review at the interim results in November," the broker said, raising its target price for the stock to 390p. Also on the upside, real estate investment trusts, including British Land, up 25.1p at 452.1p, and Hammerson, up 17.3p at 360.5p, rose despite criticism from Nomura, which said the sector was "unsafe to enter like a structurally unsound building".

"The economic reality of real estate investment trusts is, we think, much weaker than their accounting presentation," Nomura said. "Profits and real estate valuations are subjective but cash can't lie. Last year's rights issues focused on papering over balance sheet cracks and neglected cash flow. Following dilutive asset sales, some real estate investment trusts could be de-rated on the risk of follow on rights issues being priced in."

Further afield, UBS switched its stance on the electronics group Laird to "buy", forecasting a return to recovery growth in the second quarter following severe declines last year. "We believe underlying business trends are improving and as growth returns, confidence will increase in management's execution on new design wins, customer diversification and margin recovery," the broker said, keeping its target for the stock unchanged at 130p.

The shares rose 6.4p to 119.2p.