A planned reorganisation of its share capital to provide greater scope for dividend payments and continued loan growth are focusing investors’ attentions on Royal Bank of Scotland’s potentially lowly valuation
Two substantial impairment charges are holding back Barclays’ shares, even if they are potentially cheaper still, at least on one key metric.
Russ Mould, investment director at AJ Bell, comments:
“As had already been the case at Lloyds and Standard Chartered this week, solid underlying operating profit progress at RBS was supplemented in the first quarter by a drop in litigation, impairment and restructuring costs.
“Barclays also showed a healthy 15% improvement at the underlying operating level, but net income was punctured by £1.2 billion of loan and impairment costs, including £658 million after tax relating to the sale of Barclays Africa.
“That charge may raise fresh questions in the mind of some about how easy it will be for Barclays to smoothly liquidate its non-core operations. This challenge also faces RBS and may help to explain why shares in both banks trade at below net asset value, or book value.
| Share price (p) | Historic NAV per share (p) | Price/NAV |
Lloyds | 69.0 | 56.5 | 1.22x |
HSBC | 639.2 | 557.6 | 1.15x |
RBS | 258.8 | 297.0 | 0.87x |
Standard Chartered | 725.8 | 937.7 | 0.77x |
Barclays | 214.5 | 292.0 | 0.73x |
Source: Company accounts, Thomson Reuters Datastream
“If RBS and Barclays can prove they are able to extricate themselves smoothly and painlessly from their non-core operations, and reduce the number of one-off items from litigation and conduct fines, loan impairments and restructuring which continues to litter their “core” profit and loss accounts, then the shares could look cheap.
“But that remains a big “if,” especially as RBS still faces litigation in the USA amid allegations over the mis-sale of mortgage-backed securities. In addition the prospects for underlying growth at both firms still looks relatively modest, given the mature, competitive and tightly-regulated nature of the UK banking market.
“Risk-weighted assets continue to shrink as the banks sweat themselves back to health, although shareholders will be heartened by a 7.8% increase in deposits at Barclays and a return to loan growth, while RBS showed its fifth-straight quarter of loan growth.
“As such, low underlying growth and the relatively low quality of earnings increases (relying on one-off items to drop away) mean that banks will need to offer a juicy dividend yield to entice investors to hold the shares and compensate them for the risks involved.
“The two banks with the highest forecast yields – Lloyds and HSBC – offer the highest prospective yields for 2017, based on analysts’ consensus forecasts, and this helps to explain why they trade on the highest multiples of book value.
| Share price (p) | Dividend 2017E (p) | Yield 2017E | Dividend cover, 2017E |
HSBC | 557.6 | 40.2 | 7.2% | 1.28x |
Lloyds | 69.0 | 3.5 | 5.1% | 1.90x |
Stan. Chart. | 725.8 | 13.9 | 1.9% | 2.93x |
Barclays | 214.5 | 3.0 | 1.4% | 6.75x |
RBS | 258.8 | 0.0 | 0.0% | n/a |
Source: Digital Look, consensus analysts’ forecasts, Thomson Reuters Datastream
“For Standard Chartered, Barclays and RBS to close the valuation gap they therefore have to rebuild their dividend payments and at least an increase in net earnings (helped by lower litigation costs, restructuring charges and asset and loan write-downs) could help give them greater scope to do so.
“RBS today has reaffirmed its goal of reaching profitability in 2018 and the announcement of a reorganisation of its share capital in 2017 gives the lender greater scope to resume dividend payments, which have been absent since 2007.”