Market Report: Lloyds trades up as bulls pile in on margin hopes

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Lloyds was the standout riser in the banking sector as traders eyed the scope for wider margins last night.

Nomura said the state-backed lender was best placed to capitalise on the improving spread between mortgage and short-term funding rates. Rising headline mortgage rates are driving higher yields on banking mortgage books, while, at the same time, the cost of short-term funding has "come down from the levels reached a year ago". This is positive for Lloyds, which has 57 per cent – or £360bn – of its loans in mortgages and is also highly reliant on short-term funding.

It faces lower financing costs, while gaining from the repricing of the mortgage book over the next two years, something which "could add up to 40 basis points on to the Lloyds mortgage yield compared with 2009". This, Nomura said, would add £1.4bn to group revenue and over 20 basis points to the group margin.

"Lloyds is particularly geared to the theme of domestic margin expansion," the broker said, revising its view to "buy", and raising its target for the stock, which ended 1.21p higher at 55.41p, to 80p from 53p. RBS, which is rated "reduce" at Nomura, was 1.01p lower at 43.45p. Barclays, which was cut to "neutral" by the broker, was 4.15p higher at 285.35p. In the wider sector, Standard Chartered, which, like Lloyds, is rated "buy" at Nomura, was held back last night, shedding nearly 2 per cent, or 32p, to 1,710p after issuing a pre-close trading update.

overall, the London market was initially undermined by a combination of renewed worries about Europe's debt woes and, as the afternoon progressed, by early weakness on Wall Street, where leading indices made a lacklustre start amid falls in energy and oil and gas stocks. Thankfully for investors, metals prices held up and New York began to turn positive just before the close on this side of the Atlantic, helping the FTSE 100 add 25.21 points to 5,071.68. The FTSE 250 was also slightly higher, gaining 38.83 points to 9,644.88. Miners were higher, with Antofagasta rising by 55.5p to 848p and Anglo American gaining 55.5p to 2,530.5p as commodity markets cheered up. The Mexican silver producer Fresnillo, which in the past has been rumoured to be a possible bid target, also fared well, claiming pole position on the FTSE 100 with a 49p rise to 1,052p.

The commercial property groups British Land and Land Securities were firm, adding 6p to 446.2p and 5p to 586p respectively, after Morgan Stanley reiterated its "overweight" ratings on the two. The broker named Segro, which was 1.5p ahead at 264.7p, as its top pick in the sector.

"We think it is inevitable that in a low-growth environment, dividend yields will start making up a larger portion of investors' total return," the broker explained. "In addition, we think investors will give more weight to secure dividends compared to NAV growth from speculative development."

Further afield, the oil prospector Dana Petroleum, which was fired up by a renewal of bid rumours earlier this month, was 1p behind at 1,176p after Collins Stewart, unimpressed by recent exploration results, abandoned its "buy" view. "Recent bid rumours have boosted the stock and although the valuation upside still looks reasonable, we don't believe it is that compelling any more... We see much better upside in both Premier [Oil] and Lundin," the broker said, switching its stance to "hold".

On the upside, the fixed income fund manager BlueBay Asset Management gained ground after Citigroup weighed in, cutting its target for the stock to 350p from 450p, but reiterating its "buy" view. "As markets stabilise, we expect companies to return to the credit markets to raise new capital, boosting new issue volumes. Near term, BlueBay's Emerging Market fund puts it in a strong position to continue to win net inflows in that area," the broker said, helping the stock gain more than 3 per cent, or 9.3p, to close at 290.2p.

The silicon wafer manufacturer PV Crystalox Solar failed to make any headway, easing by 0.75p to 54.75p, after Goldman Sachs turned negative in a sector round-up, identifying the company as one of the higher-cost wafer producers.

The broker said that despite a recent rebound in volume demand stabilisation in pricing, it expected "increased supply from low-cost players over the next 12 to 18 months to continue pressuring" average selling prices, margins and returns. "In our view, the current ... consensus forecast for a 13 per cent EBIT margin in 2011 is too optimistic for PV Crystalox," Goldman said, moving the stock to "sell" from "neutral".

the engineering group Meggitt rose by 8.7p to 318.7p following a push from Citigroup, which adopted a "buy" view, noting that the stock was among the cheapest in its peer group. "Meggitt has an attractive combination of modest operating and financial leverage," Citi said, adding that while its forecasts currently assume a rise in the margin on underlying earnings before interest and tax (EBIT) to 26.5 per cent in 2012, its estimates may prove conservative if Meggitt's cost-cutting drive exceeds expectations.