Broker snap: Nomura upgrades Lloyds on housing recovery

An improving picture of the housing market should start to rub off on UK banks, according to Nomura, which is viewing the the sector with 'guarded optimism'.In a research report released on July 3rd, the broker said that UK house prices are 10% too low and could rise by 15% by the end of 2015 (up 6.0% in real terms). "If this were to happen, historical relationships would suggest c10% mortgage lending growth, though we temper this estimate because of deleveraging trends," Nomura said.The government's 'Help to Buy' scheme could increase credit demand by up to 2-3% per annum, while lifting housing demand by up to 7-8% per annum as a proportion of mortgage approvals from a low base, the broker said. It explained that with mortgage rates at all-time lows and rental yields high, buying and investing looks attractive."It is seems reasonable for optimism about the housing market to rub off on UK banks, especially where it can improve a bank's collateral profile to reduce loss given default (LGD). Beyond that, we need an improvement in GDP and volumes rather than just house price levels to feel more confident."However, we would look to be positively positioned towards such a trend so as not to miss the boat, but with stocks that appear to offer upside potential relative to their valuations."Nomura has upgraded its rating for Lloyds from 'reduce' to 'neutral' and raised its target price from 45p to 61p. The company is now its top pick in the domestic UK banking sector "as the optimism about the housing market, along with the capital generation it has achieved recently, should help it maintain recent outperformance".Global peers HSBC and Standard Chartered are both rated 'buy', while 'reduce' ratings have been maintained for Barclays and Royal Bank of Scotland.Lloyds' share price was up 1.4% at 64.27p by 10:16 on Thursday.