FTSE rebounds as banks lead the way

Following Tuesday’s sell-off leading shares have regained some poise, with banking shares among the main gainers.

Lloyds Banking Group has added 1.16p to 79.44 after Jefferies analysts moved from to hold from underperform and raised their target price from 69p to 88p. They said:

A progressively rising dividend (4.2p in 2017 from 0.75p in 2014) should provide support for Lloyd’s premium price/total book value valuation, despite a persistently material gap between so-called “underlying” and statutory earnings and lack of earnings upgrades. Reward/risk is no longer asymmetric to the downside and we move to hold as a result.

Meanwhile Barclays is 7.65p to 250.25p as Credit Suisse made positive noises about its South African business. Morgan Stanley was also positive on UK banks after meetings with them:

Our meetings with UK banks were characterised by a strong focus on costs, reflecting the tough revenue environment with limited prospects for strong loan growth or margin progression. Simplification and digitization is top of the agenda for the three domestic banks with opportunities seen to reduce costs and conduct risk, as well as improve the customer experience. Capital remains a further key area of focus, with domestic SIFI [systemically important financial institution} buffers, stress testing and mortgage risk weights remaining areas of debate. We increase our UK bank price targets by 5-10% to reflect increased bank levy, combined with reduced cost of equity assumptions.

Royal Bank of Scotland has risen 5.3p to 345.3p but Standard Chartered has slipped 0.5p to £10.93 as it unveiled a further board room shake-up, with executive director Viswanathan Shankar leaving to pursue other interests and a number of new appointments, including Jonathan Paul as head of financial markets.

Overall the FTSE 100 has climbed 34.64p to 6807.68, as European factory growth hit a 10 month high and despite continuing concerns about the likelihood of resolution to the Greek crisis, uncertainty over the outcome of Iranian nuclear talks and the prospect of a US interest rate rise.

GlaxoSmithKline has added 29.5p to 1575.5p as analysts at Barclays raised their target price from £16.90 to £18.40. They said:

Market expectations for Advair now fully reflect the impact of Glaxo’s new US pricing strategy. Dividend worries have been quelled with management guiding for a flat dividend of 80p in 2014/15 with growth thereafter. Post Glaxo’s 3-part transaction with Novartis we forecast a 2015-2020 earnings before interest and tax compound annual growth rate of around 7% with around 55% of incremental growth derived from cost savings.

Mike Ashley’s Sports Direct International is up 9p at 618p after Morgan Stanley issued a positive note on the retailing business:

We believe that Sports Direct has the potential to replicate its UK success in many (though not all) European markets. Even after discounting our valuation by 20% to reflect corporate governance issues, we think the shares are attractive and initiate with an overweight rating.

Among the mid-caps FirstGroup has accelerated 5.3p to 96.25p after a positive trading update, which helped lift rival Go-Ahead 75p to £24.05. On FirstGroup Investec said:

Firstgroup has reported an in-line pre-close trading update with a solid performance in UK bus and rail and stronger revenue growth at First Student than we expected. The cash outflow is expected to be up to £100m for the year, broadly in line with our forecasts, impacted by a £70m outflow from the end of the First Capital Connect franchise, with a £60m outflow in 2016 due entirely to the end of the ScotRail franchise. Our sum of the parts-based target price remains 130p and we reiterate our buy recommendation.