Lloyds screens among most defensives against coronavirus, Jefferies says
Analysts at Jefferies switched to a defensive stance on Banks from 'UK risk on' in the wake of the coronavirus, highlighting Lloyds as the most defensive play in the space.
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Not only was Lloyds seen as the "best positioned" in terms of its tangible book value, Jefferies said it also stood to benefit from a reset to zero of lenders' counter cyclical buffers by the Bank of England.
After analysing UK lenders' exposure to the travel and leisure, and oil and gas sectors, the analysts said RBS and HSBC might each see a roughly 10% impact on their TBV and a 170-200 basis point hit to their common equity tier 1 ratio.
In the case of RBS however, they said that its starting 16.4% CET1 ratio meant the fallout from the coronavirus would "surprisingly" not likely impact ordinary distributions.
For HSBC meanwhile, they pointed out that their estimate that the lender's CET1 ratio would fall below management's 14.0-15.0% target threshold might be too pessimistic given its low non-performing loss ratios in those two sectors and "apparently lower" participating in sub-investment grade consumer and retail syndicated lending activity.
Lloyds on the other hand screened defensively in terms of the potential hit to its TBV (5%) but the 80 basis point hit to its CET1 was "unwelcome" - although that could be mitigated by the 160bp impact to CET1 from a reduction from counter-cyclical capital buffers being set at zero.
"We had not factored in a pandemic such as the Coronavirus for which it seems the response on 26 March is more likely than not a 25bps cut (RBS and HSBC most exposed)," Jefferies said.
"We suspect the UK domestic CCyB - set to go to 200bps in December from 100bps today - could be recalibrated to zero (on the BOE's own estimation, this frees up $500bn of lending power across the system). The biggest beneficiary from this would be LLOY."