Broker snap: Nomura downgrades UK banks on weak outlook

Nomura has today cut its ratings on UK banking peers Lloyds and Royal Bank of Scotland (RBS) from neutral to reduce, saying that the recent strong recovery in the sector should be seen as a selling opportunity."Both groups are banking sector restructuring stories and therefore geared to market risk appetite, and we regard the current sector rally as a selling opportunity in what are likely to be drawn-out recovery projects in both cases," Nomura said.The broker believes that the two firms are likely to see downgrades to results in both their core operations and in the costs of exiting the non-core."Core banking operations are likely to experience revenue downgrades due to a combination of weak volume in a slow economy, where customers are also seeking to deleverage and margin declines from persistently low rates on the asset side and liability spread pressure from deposit competition and increased wholesale refinancing costs."Meanwhile, in non-core, impairments are expected to be high as a result of the slow pace of economic recovery.RBS's price target is cut from 34p to 26p, while Lloyds is cut from 40p to 35p.Separately, the broker downgraded its rating for Barclays from buy to neutral but left the target price at 268p."While we don't see the asset quality risks that we see in Lloyds and RBS, Barclays' earnings outlook remains challenged in the absence of any measures to realign the business model to current realities and the need to build capital," the broker said.BC