Oriel says buy Lloyds on TSB IPO and improving yield

Broker Oriel said Lloyds Banking Group's offloading of TSB should enhance net interest margin (NIM) for Lloyds and, with a rising dividend yield, has reiterated its 'buy' recommendation on the bank.With a Tier 1 capital (CET1) ratio of 10.7% and leverage ratio of 4.5% at the end of the first quarter, and the underlying business generating 70 basis points of CET1 during the quarter, Lloyds's capital position is now "substantially improved and the story has shifted towards earnings quality and dividend paying potential", Oriel suggested. "So while TSB valuation expectations may be under pressure, which is likely to negatively impact book value forecasts, the disposal of TSB should be NIM enhancing for Lloyds, reflecting lower asset margins in the TSB book," analyst Vivek Raja wrote. "This improvement should become apparent once TSB is deconsolidated, which will depend on how quickly Lloyds sells down its stake." The European Commission requires Lloyds to have fully disposed its interest by the end of 2015. Furthermore, Oriel view consensus dividend expectations as "too low" and forecast yield to rise close to 7% by 2016. Although some forthcoming risk to mortgage risk-weighted assets exist, Lloyds is also the dominant UK bank and therefore exposed to the improving UK macro story, as evidenced by the improving credit quality trend and the sustained pace of non-core deleveraging. "While the UK housing market may be showing cooling signs, which will impact Lloyds' mortgage business, slower balance sheet growth is no bad thing in the context of capital, a subject the regulator remains hawkish about. We continue to see earnings expectations as well underpinned, with further scope to improve quality through cost efficiency, impairments and NIM." OH