Mass upgrade as banks’ cost of equity drops

Tim Wallace
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BRITISH banks have built up capital levels and cut down leverage more successfully than their European rivals, and should soon reap the benefits in a lower cost of equity, Liberum Capital forecast yesterday.

And if the Eurozone stabilises further, risks to the industry outlook will fade and banks will be in an even stronger position, Liberum argued.

The analysts upgraded Barclays, RBS and Lloyds yesterday, telling investors that their cost of equity has fallen from 10 per cent to 9.25 per cent.

The move is particularly important as banks are struggling with falling returns on equity thanks to increased regulatory pressures.

As a result, bank’s profitability should rise – Liberum believes the shares could jump by an average of 14 per cent, and 30 per cent if the Eurozone settles down.

“From 2008 to 2012, UK banks will have boosted their fully loaded Basel III equity ratios from 4.3 per cent to 8.6 per cent,” said Liberum’s Cormac Leech, explaining the firms’ strength.

“Improvements in liquidity strength have been equally impressive: loan deposit ratios for the domestic banks will have decreased from 157 per cent to 113 per cent over the same period.”

But it is not just those three banks which are increasingly strong.

Standard Chartered and HSBC are the top picks on balance sheet strength and low Greece, Italy, Ireland, Spain and Portugal exposure, with cost of equity reduced from 9.5 per cent to 8.75 per cent,” Leech wrote.

“Our target prices have increased on average by 14 per cent.”