Market Report: Lloyds strengthens as traders see upside

Lloyds Banking Group was in focus as buyers outnumbered sellers on hopes of a doubling of the state-backed lender's share price last night.

The shares were marked up, adding 1.2p to 64.2p, after Bank of America Merrill Lynch said they could double on a two-year view. The hopes were based on the prospect of rising margins and net interest income, which, when coupled with falling costs, can drive a "step change in pre-provision profits". Merrill said that when taken together with a sharp reduction in bad debts, this could boost proforma profit to £3.5bn in 2010 and "command earnings of 12p by 2012" , thereby beating consensus estimates by around 35 per cent. "We believe the story of rising margins, falling costs and sharply decreasing bad debts is compelling," the broker said, reiterating its "buy" view and raising its 12-month target for the stock to 85p from 80p. "On a two-year view, our [sum of the parts analysis] drives a valuation of 122p, suggesting that the share price could more than double if our projections prove correct."

Parts of the wider banking sector were also on a firm footing after the Chancellor held back from imposing a unilateral bank tax, calling instead for international co-ordination on the issue. As expected, he announced that Royal Bank of Scotland and Lloyds, both of which count the Treasury as a shareholder, will provide £94bn in new business loans over the next year. At the close, after Lloyds, RBS was the strongest, adding 0.43p to 44.49p. Standard Chartered, up 12.5p to 1798p, continued to draw support from hopes that the indebted Dubai World glomerate would soon put forward a restructuring plan to creditors.

Overall, sentiment took an early hit after the Fitch ratings agency lowered its view of Portugal's sovereign debt, citing last year's budgetary underperformance and warning on the medium impact of the global economic crisis on the country's economy and public finances. The news, which came against the backdrop of renewed concerns about the fiscal situation in Greece, knocked confidence around the euro, which swiftly struck a 10-month low. The FTSE 100 also fell back, touching a session low of 5636.01 before recovering to 5677.88, up 4.25 points, after the Chancellor delivered hits Budget statement. The FTSE 250 was 51.02 points higher at 10081.12.

Alistair Darling's decision to lift the stamp duty threshold for first-time buyers to £250,000 boosted the mood in the house building sector, with Barratt Developments rallying to 128.5p, up 3.9p, and Bovis Homes adding 7.1p to 403.5p on hopes of increased transactions. Persimmon was also strong, climbing by 13.7p to 459.7p, while Bellway swung to 760p, up 40.5p, after cheering the market with its half yearly results, which were accompanied by the announcement of a 10 per cent rise in the interim dividend.

Elsewhere, InterContinental Hotels was 21p behind at 1019p after going ex-dividend. The shares were also under pressure following some cautious comment from UBS, which, while removing the stock from its least preferred list of European leisure plays, stuck to its "sell" recommendation. "InterContinental's rating reflects our belief that American franchised hotel income will not recover until 2011 and recovery will be slow," the broker said. "In addition, the company will have no room growth in 2010."

Further afield, ITV, up 2.8p at 57p, gained ground on the read-across from Mediaset, Italy's biggest commercial broadcaster, which lifted hopes by saying that advertising sales in the first part of 2010 were "decidedly positive". Also on the upside, the transport group Arriva, which is the subject of an approach from Germany's Deutsche Bahn, and which yesterday was removed from the "conviction buy" list at Goldman Sachs, was 33.5p stronger at 750p as traders awaited bid developments, with some in the market pegging their hopes on a counter-offer from France's SNCF.

Goldman said that, apart from the prospect of deal activity, it saw three key drivers for Arriva, including volume growth as UK and European unemployment stabilises, a growing focus on underlying earnings once the UK rail and Netherlands losses come an end, and market share gains on the back of National Express's exit from UK rail. "We view Arriva's prospects on a standalone basis as positive," the broker said, keeping its target price unchanged at 800p.

Citigroup supported DSG International, which rose by 0.66p to 34.63p after the broker, weighing in on the back of the recent strategy update, reiterated its "buy" view. "The renewal and transformation plan is on track, with gross profit uplift seen from new format stores up 20 per cent and the £200m cost savings programme on track," Citi explained.

Sthree, up 9.3p at 342.2p, also drew stream from some positive investor day feedback, with UBS saying the recent presentation supported its "buy" recommendation. "SThree's indicative future profile suggests the UK and Germany will each be around 23 per cent of revenue, implying strong growth potential in Germany," the broker said. "Non-Europe is also expected to represent around 30 per cent of sales versus 6 per cent now."