Market Report: Banks booming on Basel III rules relief

Investors went wild for banking stocks yesterday after rules for lenders turned out not to be as strict as feared. British banking stocks flew to the top of the benchmark index as a watered-down version of Basel III "liquidity coverage ratio" rules and a delay to its introduction were confirmed.

Punters piled in to financial groups in Europe and London and Barclays was top of the table on the benchmark index, adding 10.5p to 287.2p. Lloyds Banking Group was also strong, gaining 0.64p to 50.5p.

The banks had been campaigning for less severe rules and now, like teenagers whose curfews have just been extended, they were celebrating. The Basel Committee on Banking Supervision agreed on Sunday to a much more lenient version of the draft agreed two years ago.

The definition of liquid assets has been broadened and now even includes some mortgage-backed securities. The process of calculating the liquidity coverage ratio has also been changed so banks won't have to hold as much as they thought. Plus there is no rush – they have from 2015 to 2019 to get used to all the rules in full.

The banks were up but the rest of the blue-chip index failed to hang on to last week's gains. The FTSE 100 index lost 25.26 to 6064.58.

Angus Campbell, head of market analysis at Capital Spreads, said: "On the first day of the first full trading week of 2013 it was the turn of the bears to bring a little reality check. Looking ahead, the fiscal issues for the US that caused so much uncertainty towards the end of 2012 will be back to haunt us in only a matter of weeks, as US politicians will have to negotiate over the debt ceiling once again and a raft of government spending cuts."

He added: "The upward trend for equities so far in 2013 still looks to be intact. However, there's bound to be some bumps along the way."

The broadcaster ITV, which unveiled its latest period drama, Mr Selfridge, at the weekend, joined the banks as a stock in demand. It transmitted a 1.1p rise to 109.6p as Liberum Capital scribes upped their share price target to 155p and retained their buy rating.

Turning to insurance stocks, an analyst at Investec Securities has changed horses. He thinks Aviva is now the one to back, rather than Prudential. Investec's Kevin Ryan thinks Aviva will issue a "steady flow of good news" over the next 12 months which is likely to contrast with Prudential, so it could be time to think about switching from shares in the man from the Pru.

Mr Ryan reckons the arrival of Mark Wilson as chief executive, combined with its new restructuring plan will result in a "slimmer, more financially efficient Aviva", and he expects shares to outperform. He rates Aviva a buy and gives a share-price target of 422p. Aviva's shares rose 1.5p to 388.4p.

For the past four years, Prudential has outshone Aviva and has been achieving the targets it set in 2010. But Mr Ryan argues it needs to set fresh targets if it is still to be viewed as a growth story. He also pours cold water on speculation that the Prudential will break itself up or attempt a partial separate listing and sell its Asian business because "cash generation signatures of the Asian and US businesses are unlikely to be either large or mature enough to tempt an agency to offer a separate rating for these businesses". He rates the shares a hold and gives a target price of 831p, as opposed to yesterday's 911p, down 7p.

There was more bad news for the aerospace expert Rolls-Royce. A blogger has accused it of bribing an executive involved with two Chinese airlines. That follows its announcement last month that it had been approached by the Serious Fraud Office over issues in China and Indonesia. The shares nosedived 13.5p to 904.5p.

Traders in the mood for some new year rehashing of last year's gossip speculated that the property group Hammerson might be the subject of a bid. Bid speculation has accompanied the property specialist on and off for years, and the shares failed to react, losing 1.3p to 492p.

Scribes at Credit Suisse took the red pen to the gas group BG Group and cut their share target price to 1,215p from 1,300p, retaining their neutral rating. The shares lost 6p to 1,032p.

On the small-cap index, the Russian oil explorer Ruspetro sank more than 18 per cent after investors reacted to news on Friday. It said output is way below what investors had hoped, with current production at about 6,540 barrels of oil a day. The shares were off 15.5p to 68p.

But over on the AIM index, the iron ore and manganese explorer Ferrex announced a positive scoping study update from its Malelane iron ore project in South Africa. Its shares ticked up 0.15p to 2.02p.

Buy

BRITISH AMERICAN TOBACCO

Inhale some shares from cigarette maker British American Tobacco, Deutsche Bank analysts suggest. They have lifted their rating to buy from hold and raised their share price target to 3,300p, up from 3,200p. The shares wafted up 19.5p to 3,194p. Deutsche's experts argue that now regulatory changes are known, 2013 is looking good for tobacco stocks.

Sell

MORRISONS

Shoppers turned away from Morrisons' stores, and Seymour Pierce recommends walking away from its shares. The broker said that "despite soft comparables", the supermarket chain "has had another difficult Christmas", and it has cut its target price from 250p to 230p for the shares, which are now 256.1p.

Hold

NICHOLS

Stick with shares in Nichols, Investec recommends. Analysts think that yesterday's pre-close trading update from the Vimto and WeightWatchers soft drinks maker confirmed that it "will once again outperform its industry despite economic and climate challenges". The shares closed up 33p 858p. Investec's target price is 800p.