The euro zone debt crisis is showing signs of reaching a solution and investors should be upgrading their outlook on U.K. banks, according to investment firm Liberum Capital.
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“For over two years, the U.K. domestic banks have been ‘high risk’ due to the euro zone crisis. However, for the first time during the crisis, there appear to be tentative signs of a potentially lasting solution,” Cormac Leech an analyst at the firm said in a research note.
Continuing speculation regarding another round of quantitative easing from the European Central Bank (ECB) is the reason Leech believes an end could be in sight. Added to that, the apparent acceptance of a recovery strategy by German politicians and the likeliness that Italy and Spain would be willing to meet their austerity packages.
“We expect dissension to ECB QE from the Bundesbank and euro skeptics to dissipate during September and October as the alternatives are explored or publicly debated more thoroughly,” he said.
German Chancellor Angela Merkel said last week that the country was committed to doing everything it can to maintain the common currency.
Markets have since rallied with a consensus that stimulus is just around the corner, even though officials at the ECB and in the German government have poured cold water on reports the ECB will try to cap peripheral bond yields.
In its report, Liberum said it was upgrading The Royal Bank of Scotland’s shares to buy from hold. The firm added that the bank’s shares could rise 28 percent if the euro zone stays intact.
With Lloyds , Liberum sees a potential 26 percent rise and it upgraded the bank from a sell to a hold.
RBS recently reported earnings that were worse than expected, with a 1.99 billion pound ($3.1 billion) loss in the first half of 2012. Lloyds also reported a loss of 676 million pounds ($1.06 billion). Despite this, Liberum are adamant that both banks showed improvements in their reports.
“The interim results for the domestic banks indicated uniformly solid improvements in balance sheet strength, credit quality and cost control, resulting in overall ‘beats’ for each bank despite somewhat mixed revenues,” Liberum said.
Liberum has also taken into account possible fines for the emerging libor scandalthat could affect both firms. It said litigation could have a 2 billion pound impact on RBS and just 1 billion pounds for Lloyds.
As well as these fines, Liberum believes that earnings will remain weak but that won’t stop an upturn in valuations, which they expect to happen soon.
“A 10-15 percent rally for RBS looks likely over September/October as the proposed ECB (quantitative easing) solution is debated,” Leech said.