Market Report: Broker helps Lloyds to pull ahead of peers

Lloyds Banking Group bucked a weak banking sector trend last night, rising even as its peers fell back after Deutsche Bank said it saw share price upside regardless of whether or not the group opts for the Government's asset protection scheme.

Participation would offer short-term certainty, higher long-term earnings and surplus capital. On the hand, avoiding the APS, opting to raise private sector capital and self-insuring against loan losses would strengthen Lloyds' hand if it has to face up to substantial asset disposal and restructuring demands from European authorities, the broker explained, saying that in light of the recent pullback in the share price, both options should yield gains for investors.

"We see share price upside inside or outside the APS, though the complexity and capital demand of the self-insurance [route] threatens to make the short term volatile," the broker said, switching its stance to "buy" from "hold", with a revised 115p target price, compared to 100p previously.

"Given the lower complexity, better earnings outcome and significant surplus capital we think APS entry is a very defensible possibility as it provides downside protection, does not demand up-front money from [the] market, and leaves [the group] exposed to loan write-backs in the medium term," Deutsche added, helping Lloyds, which said it had reached an agreement to sell its Halifax Estate Agents business to LSL Property Services, rise by 1.69p to 93.1p. LSL was 18p stronger at 285p last night.

In the wider banking sector, Barclays fell to 372.25p, down 7.65p, and Royal Bank of Scotland was 1.16p weaker at 47p, as buyers stepped back following results from Bank of America, which reported a loss of $1bn for the third quarter of the year. HSBC and Standard Chartered were also unsettled, with the former retreating to 694p, down 13.9p, and the latter closing at 1543p, down 30p.

Overall, the FTSE 100 continued to drift lower, easing by 32.71 points to 5190.24, while the FTSE 250 fell back to 9426.2, down 58.97 points. David Jones, chief market strategist at IG Index, blamed the Bank of America numbers for the weakness. "After a week of strong numbers from US companies – particularly the banking sector – this served as something of a wake-up call to investors who may have started taking it for granted that there were no more shocks left to come from financial stocks," he said.

On the downside, Sainsbury's, which enjoyed strong gains on the back of rumours of bid interest from QIA, the Qatari sovereign wealth fund, on Thursday, suffered as the chatter dissipated, losing 4 per cent or 13.8p to 328.7p. Traders said that stake-building by the Qatari investors, who already own 26 per cent of the company, was more likely than a full bid. Elsewhere, most were also sceptical of renewed chatter of bid interest around British Land, the commercial property group, which was broadly unchanged, closing at 472.9p, up 1.9p. Unidentified Middle Eastern investors were rumoured to be eyeing the business.

Profit-taking was once again in evidence around the miners, with Kazakhmys declining to 1258p, down 37p, and Antofagasta losing 20.5p to 830.5p. Vedanta Resources was 57p behind at 2312p and Rio Tinto, which boosted the sector with a set of positive production figures earlier this week, lost 30.5p to 2915.5p.

Xstrata was 22p weaker at 988p as the sector trend overshadowed some words of support from Citigroup, which characterised the group's decision to walk away from Anglo American, down 16.5p at 2199.5p, as a positive move. "Although we see benefits to Xstrata shareholders from a tie-up (synergies, cost-cutting, project optimisation) these must be weighed against the inherent merger/integration risks and increased exposure to South Africa," Citi said, reiterating its "buy" stance on the stock.

The advertising group WPP was 13p weaker at 583.5p following some negative commentary from Morgan Stanley. In an agencies sector round-up, the broker said WPP was its least preferred stock, owing to high leverage, poor new business trends and structural questions regarding market research. Morgan Stanley was more positive on Aegis, which was 1.4p higher at 119.9p at the end of play.

Persimmon, the house-builder, was 2.9p ahead at 449.8p after UBS raised its earnings estimates for the group. The broker stuck to its "neutral" stance on the stock, saying that while it liked Persimmon's model and management team, it saw better valuation upside at sector peers Bellway and Barratt Developments, both of which are rated "buy". At the close, Barratt, down 0.5p at 249.1p, was marginally weak, while Bellway edged up by 4p to 825p.

Further afield, the care provider Caretech Holdings saw its shares ease to 435p, down 10.75p, after Goldman Sachs switched its stance to "neutral", removing the stock from its "buy" list following recent gains.

Looking ahead, the broker said it expected earnings to remain strong, supported by stable patient occupancy rates, although growth may slow to below 125 beds for the second consecutive year in 2010, following an average of 295 over the previous three years.