Lloyds Banking Group plc: LLOY stock to benefit from potential PBT uplift of 48 pct on deposit growth

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Category: Share Price Drivers

Published on Monday, 04 February 2013 14:52

Written by Sam Coventry

Stocks in focus: Lloyds Banking Group plc (LON:LLOY) + Lloyds Banking Group PLC (ADR)(NYSE:LYG).

Focus of article: Lloyds stock could benefit from an impending UK deposit glut.

Lloyds Shares have received a boost from Liberum Capital today; the brokerage have upped their target price on LLOY from 50 to 62.

The boost comes as analysts see the potential for Lloyds to benefit from an increase in deposit reserves after noting funding rates are declining faster than asset rates:

"Since May 12, new 2 year deposit rates have declined 100bps (from 3.61% to 2.61%) while new fixed mortgage rates have declined 21bps (from 4.04% to 3.83%).

"The BoE estimates that 60% of QE converts to UK bank deposits. With more QE almost certain given the moribund UK economy, a UK ‘deposit glut’ looks imminent. As a bluesky scenario: if LLOY’s deposit funding margins converged with Wells Fargo’s the PBT uplift would be 48% (before including asset margin erosion).

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Also boosting the investment case for Lloyds Banking Group is a manageable regulatory risk.

"Following the coming March FPC review, LLOY is likely to raise CoCo capital and/or sell some of its insurance businesses. However the valuation impact is unlikely to exceed 5% in our view. Our valuation conservatively includes an additional £3bn for fines and customer compensation costs (PPI etc)," say Liberum.

Markets witness agressive correction to Friday's gains

The euphoria of Friday has been completely swept aside today in an aggressive market sell-off.

We knew this correction was coming, but the extend of today's losses will catch some off-guard.

Lee Mumford at Spreadex says:

"A combination of political uncertainty in Europe and worse than expected UK construction PMI sent European shares lower on Monday. Wall Street futures are scheduled to open lower, with the Dow Jones trading down 100 points. US factory orders are scheduled to kick of a fairly light economic calendar this week, with economists expecting a 2.3% increase in orders after a flat reading in November.

"The Spanish Ibex fell 1.5% and the Italian MIB 2% as a corruption scandal in Spain escalated and uncertainty ahead of an Italian election posed a threat for future growth. Spanish Prime Minister Mariano Rajoy denied wrongdoing in a growing corruption scandal on Saturday which threatens his credibility.

"Brent crude was also on the decline as renewed talks between western governments and Iran spurred speculation that last week’s gains were excessive."

Government will pressure UK banks to clear cheques faster

The government will intervene in the UK payments system to pressure banks to accelerate cheque clearing and make it easier for new banks to compete with established ones, George Osborne, chancellor, announced on Monday.

Comparing the payments system to telecoms and the electricity grid, Mr Osborne told an audience in Bournemouth that the structure is too heavily dominated by the four big banks that now handle 75 per cent of all current accounts. New entrants cannot just plug into the system but must instead seek access via an established rival.

“Why is it that big banks can move their money around instantly, but when a small business wants to make a payment it takes days?” Osborne asked. “The system isn’t working for customers, so we will change it.”

Tags: Lloyds Banking Group plc (LON:LLOY) + Lloyds Banking Group PLC (ADR)(NYSE:LYG)