Market Report: RBS joins in as FTSE 100 mounts relief rally

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The bulls piled back into the Royal Bank of Scotland as the blue chips switched course last night, heaving a sigh of relief as Greece asked for aid.

The taxpayer's profits widened as RBS was marked up by 1.95p to 55.8p after Barclays Capital advised clients to back it over Lloyds, which closed at 68.48p, up 2p. RBS is now well above both the average price of Treasury's total investment – 50.2p per share – and the total investment net of fees, which works out to 49.9p per share, while Lloyds is above the 63.2p per share the taxpayer paid for its stake, net of the asset protection scheme exit fee. Including the APS fees, the Treasury's total investment in Lloyds is valued at an average of 73.6p per share.

Barclays said that not only did RBS boast a "more credible strategy" to shrink its balance sheet, but it also faced less of a funding risk than Lloyds. "Both banks intend to aggressively shrink their balance sheets," the broker said, upgrading its stance on RBS to "overweight" with a revised 70p target price, while keeping Lloyds at "underweight", albeit with a revised 65p target, compared to 53p previously. "Although for Lloyds this should help mitigate the otherwise damaging costs of rolling its wholesale funding, we believe the market is underestimating the overall negative impact on revenue from the asset run-off, which we estimate will reduce revenue growth from a CAGR [compounded annual growth rate] of 4 per cent to 1 per cent over 2009-2013."



overall, the euro strengthened and the FTSE 100 mounted a comeback, adding 58.32 points to 5,723.65, after uncertainty about Greece's debt woes was answered by the country finally requesting aid from the EU and the International Monetary Fund. The FTSE 250 also mounted a relief rally, gaining 165.93 points to 10,601.54 as traders regained their appetite for risk. The news offset the impact of what were seen as disappointing UK GDP figures, with the economy expanding at a slower-than-expected pace over the first quarter.

The miners, who tend to closely track movements on the commodity markets, rose in tandem with metals prices, with Fresnillo adding 19p to 835p and Lonmin closing at 1,986p, up 57p. Rio Tinto, Antofagasta and Anglo American were also higher last night, rising by 95.5p to 3,740p, by 30.5p to 993.5p and by 60p to 3,2860p respectively. The oil majors were also firm last night, with Royal Dutch Shell adding 23p to 1,992.5p and BP, which moved to respond to an oil spill in the Gulf of Mexico, adding 3.3p to 639.7p.

On the downside, ARM, the chip-maker that in recent sessions drew strength from rumours of bid interest from the likes of Apple and Intel, fell back, losing 4.5p to 254.4p, after its chief executive, Warren East, was quoted as playing down the prospects of deal activity. Its smaller peer Imagination Technologies, which counts both Apple and Intel as shareholders, continued to draw steam from bid chatter, however, with the stock rising to 285p, up 7p, last night.

Back on the upside, the temporary power provider Aggreko was 20p firmer at 1,220p after UBS said the recent Bangladesh Power Development Board contract revealed the high barriers faced by those seeking to compete with the company. "The contracts were initially awarded to small, inexperienced players – who didn't deliver, so Aggreko was approached again," the broker said, reiterating its "buy" view on the stock. "Of the larger players, Aggreko was the only one with capacity to respond quickly ... This clearly shows it is about much more than pricing."

Further afield, the IT group Computacenter was buoyed by the read-across from Microsoft's quarterly results, which evidenced a stronger outlook for the software giant's Windows 7 operating system. Faster adoption rates for the new platform augured well for Computacenter's PC sales, according to Panmure Gordon, which said it was now anticipating higher French and UK PC revenues for the company.

UBS supported ITV, the broadcaster, which rose by 2.55p to 69.5p after the broker suggested the increased momentum in advertising revenues should help offset the reinvestment that is likely to occur as a result of the company's strategic review. "We estimate that the strategic review will lead to reinvestment of £50m, of which £17m comes in 2010 and £33m in 2011," the broker said, repeating its "buy" view. "We believe the investment will be focused in programming, ITV studios and in the online offering."



elsewhere, wine retailer Majestic Wine received a boost from Goldman Sachs, gaining 8p to 290p after the broker turned positive, moving the stock to "buy" from "neutral" on account of an attractive balance between risks versus rewards.

"Consensus numbers do not fully reflect the potential for margin expansion as sales densities increase," the broker said, revising its target for the stock to 356p from 286p. "In our view, consensus largely reflects the near-term top-line growth opportunity, but does not fully reflect Majestic's operating leverage potential," Goldman added, forecasting a 70 basis point expansion in Ebit – earnings before interest and tax – margin in 2010.

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