Investec has upgraded its recommendation for UK banking group Lloyds from 'sell' to 'hold' and lifted its target price for the shares from 46p to 50p.

The broker said that Lloyds' share price has delivered a "useful" 10% correction over the past two weeks after the company's full-year results.

"Alongside modest forecast revisions, this prompts an upgrade to 'hold' (from 'sell'). We still advise relative caution on Lloyds, but we now recommend the closure of naked shorts," said analyst Ian Gordon.

Lloyds announced on Tuesday that it had trimmed its stake in St James's Place and realised a £400m gain (including fair-value benefit) after a placing.

Together with gilt sales which crystallised £3.2bn of gains in 2012, Gordon said: "this may both optimise value, and potentially tip the balance in its battle with the Financial Policy Committee to avoid value-destruction from fresh dilutive equity issuance, (beyond the £350m announced on March 1st)."

He said that 2013 guidance for net interest margin (NIM) fell to an "underwhelming" 198 basis points (compared with 193 basis points in 2012). As such, with further planned balance sheet shrinkage and the European Commission-mandated Project Verde disposal due this year, he believes that Lloyds could struggle to see any revenue growth before 2015.

"However, 'nailed on' absolute reductions in costs and impairments should continue to support a recovery in return on equity to c.8.0% by 2015e."

Shares were up 1.78% at 50.89p by 09:57 on Tuesday.

BC

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