Credit Suisse First Boston says UK banks are well placed to outperform continental European banks o...
Credit Suisse First Boston says UK banks are well placed to outperform continental European banks on the back of the sector's defensive qualities.
But Bruce Packard, analyst at CSFB, believes full-year results for the UK banking sector have been slightly disappointing, with banks struggling to repeat relatively strong operating performance in the first half of the reporting year.
He adds that there have been no unexpected credit quality issues as the market has largely priced in events such as the Enron collapse and Argentinian debt crisis.
Packard says: 'Following the UK banking results season, we are moving down our 2002 estimates by between 2% and 13% at the attributable profit level. The majority of these revisions are caused by larger-than expected restructuring expenses and merger integration costs.
'However, we still advocate an overweight position in UK banks versus European banks. The results highlighted the defensive qualities of the UK banks in comparison to most of those on the continent. We believe the key challenge going forward will be volume growth, particularly in the retail consumer market, as interest rates begin to rise and the mortgage market reaches a cyclical peak. The banks' attempts to cross-sell products will be key to the creation of shareholder value.'
Commerzbank is favouring banks such as Alliance & Leicester, which it sees as cheap, and has raised its price target for the stock to £10 from £9.39 with the current share price being £8.41. James Eden, analyst at Commerzbank, says Alliance & Leicester's management is look- ing to cut business costs by £100m by 2004 and is confident the group will deliver on this. Eden also points out that during 2001 Alliance & Leicester achieved a 4.8% share of net mortgage lending compared to its 3.7% share of total mortgages outstanding.
Barclays is CSFB's favoured stock in the UK banking sector, with Packard pointing out that it has a broad business mix when compared with other European banks. Commerzbank is also keen on Barclays and has raised its price target for the group to £25.50 from £23, with the recent share price of the bank being £22.15.
Eden says: 'This is a well-run company with a clear focus on delivering shareholder value and we think its strategic options are underrated by the market. In terms of strategic options, we would support the logic behind an acquisition of Standard Chartered ' there would be synergies from selling Barclays Capital products to its corporate customer base as well as head office cost savings. In addition it would enable Barclays to run its UK business as a cash cow and send surplus capital overseas where it might earn better returns.'
Eden adds that Barclays' acquisition of the Woolwich last year is also benefiting the group and Commerzbank is forecasting that the Woolwich will achieve 13.2% profits growth in 2002 and growth of 11.9% up to 2005.
He says: 'These impressive growth rates reflect a combination of strong organic growth and the delivery of cost savings from combining the Woolwich and Barclays Mortgages businesses.'
CSFB overweight UK banks.
Investment groups favour Barclays.
Enron and Argentina shocks priced in.
Full-year banking earnings disappointing.
CSFB downgrading Lloyds TSB and HBOS.
Threat of more subdued retail market.
£300bn of liabilities
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