Shares in Barclays , Lloyds Banking Group and Royal Bank of Scotland rise as much as 2.5 percent after Liberum Capital upgrades its rating on all three lenders in a note on the UK banking sector, citing reduced tail risks for UK banks leading to lower cost of equity.
Liberum says in a note that while the subdued single digit outlook for UK Banks' return on equity is well understood, a more intangible - but equally important factor - for valuation is the appropriate cost of equity.
"As Euro-zone tail risks become more clearly bounded, UK banks' reduced balance sheet leverage will gradually translate into a lower cost of equity," it says, lowering the cost of equity in its valuations by 0.75 percent, which implies 10 percent-plus upside for all UK banks.
The broker says near term potential catalysts include monetary support from the European Central Bank for Spain and further QE (quantitative easing) in the UK, while the bear case of exits from the euro from the likes of Spain and Greece remains weighted at 25 percent.
Standard Chartered and HSBC are its top picks on balance sheet strength and low stressed euro zone exposure.
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Keywords: MARKETS EUROPE STOCKSNEWS