A Fool looks for value in Royal Bank of Scotland Group plc (LON:RBS), Lloyds Banking Group PLC (LON:LLOY) and Barclays PLC (LON:BARC).
Royal Bank of Scotland Group (LSE: RBS), Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) and Barclays (LSE: BARC) (NYSE: BCS.US) had a terrific run last year. Shares in Lloyds rose by 85%, RBS gained 60% and Barclays managed a 49% increase.
After a performance like that, you might think it was too late to buy into the banking recovery, but I've recently been taking a closer look at the figures with a view to buying shares in one of these banks myself, and I think that one of them, in particular, still offers compelling value.
Banking value
Let's start with a look at some of the banks' key metrics:
| Company | Royal Bank of Scotland | Lloyds Banking Group | Barclays |
|---|
| Current share price* | 340p | 52p | 297p |
| Net tangible asset value per share** | 476p | 56.6p | 379p |
| Price-to-tangible book ratio (P/TB) | 0.71 | 0.92 | 0.78 |
| Forward P/E ratio | 12.2 | 13.5 | 7.9 |
| 2013 forecast dividend yield | n/a | n/a | 2.7% |
*Opening share price on 07/02/2013.
**Tangible asset value per share taken from Q3 2012 interim report from each bank.
The main value attraction is that all three banks have a P/TB ratio below 1 -- meaning that in theory, they would be worth more if they were liquidated than their current market value.
Healthy banks generally trade at or slightly above book value -- HSBC has a P/TB ratio of 1.2, for example -- so these banks' discounts represent an attractive value opportunity, if you believe they will eventually recover.
Although Lloyds and RBS don't currently pay dividends, both are keen to restart dividend payouts, and brokers' forecasts are pencilling in dividends from both banks this year. This would improve the potential returns from each bank, and would be likely to drive further share price growth, as it would encourage institutional investors to buy back into these stocks.
How reliable are these asset values?
It's important to remember that the main reason these banks are trading below their tangible asset value is that doubts remain over whether this value can ever be realised. The banks aren't out of the woods yet.
Over the last three years, all three banks have been forced to write down the value of some of their assets and sell others. During the first nine months of 2012 alone, all three reduced their estimate of net tangible asset per share:
| Company | Net tangible asset value per share 31/12/11 | Net tangible asset value per share 30/09/12 | Change (%) |
|---|
| Royal Bank of Scotland | 501p | 476p | -5% |
| Lloyds Banking Group | 58.6p | 56.6p | -3.4% |
| Barclays | 391p | 379p | -3.1% |
Legal dramas
Asset risk aside, these banks also face legal problems. On Tuesday, Barclays announced that it was increasing the amount of money it was setting aside to deal with claims relating to mis-sold interest rate hedging products by £400m, taking the total provision to £850m. At the same time, it said it was adding another £600m to the compensation pot for payment protection insurance (PPI) claims, taking that total to £2.6bn -- hardly business as usual.
Wednesday saw Royal Bank of Scotland in the spotlight once more, as it confirmed that it would pay £390m of fines to UK and US authorities to settle claims relating to Libor manipulation.
Lloyds is also heavily involved in the PPI scandal, and the banks may yet face further regulatory investigations into past misdeeds -- RBS, for example, faces charges of fixing Euribor and is involved in an investigation relating to money laundering in the US.
The bank I'd buy
The bank that attracts me the most is Barclays. Although it's had its fair share of legal and regulatory problems, it hasn't required a state bailout and doesn't face the prospect of further state intervention in its operation or management.
Barclays' discount to tangible book value is almost as large as that of RBS, and it didn't reduce its net tangible asset per share value as much as Lloyds or RBS in the first nine months of last year.
What's more, Barclays offers a 2.7% forward dividend yield, and its forward P/E of 7.9 is much lower than that of the other banks, making a near-term uprating of its share price more likely.
A better growth choice?
I believe that banking shares like Barclays have the potential to deliver significant growth as they recover. However, I understand that you may still be wary of investing in these banks -- because frankly, who knows what skeletons are still lurking in their cupboards?
Luckily, there are some strong contenders for growth shares outside the financial sector. I'd like to suggest you take a look at one UK stock that outperformed the FTSE 100 by 32% in 2012 and has delivered 44% earnings per share growth since 2009. It's already ahead of the wider market in 2013, too.
You can find full details of this company -- which the Fool's analysts believe could be seriously undervalued -- in this free report, "The Motley Fool's Top Growth Stock For 2013". Just click here to download your free copy now -- but hurry, it will only be available for a limited time.
> Roland owns shares in HSBC but does not own any of the other shares mentioned in this article.
