So, the results are in and Scotland has decided to remain part of the UK. Whether you think that’s good news or bad news for Scotland and/or the UK is clearly subjective. However, for investors in Lloyds (LSE: LLOY) (NYSE: LYG.US)and RBS (LSE: RBS) (NYSE: RBS.US) it’s undoubtedly a good thing. Here’s why.
Disappointing Performance
Despite both banks delivering strong results during the course of 2014, their share prices have disappointed investors. For example, shares in Lloyds had fallen by 3% and RBS was up only 5% prior to today’s ‘no’ vote.
A key cause of this has been the fact that both banks are registered Scottish entities, and so the uncertainty surrounding Scotland’s future has kept sentiment at a low ebb. Now that Scotland’s future as part of the UK is secured (albeit with greater powers for Scotland), it would be of little surprise to see the shares of both banks enjoy a period of much improved sentiment.
Profitability… At Last!
After all, both banks are set to return to profitability this year. Furthermore, in both cases this is set to be the first year since the start of the credit crunch when their bottom line is black, rather than red.
A key reason for the return to profitability a lot quicker than many investors anticipated is the strategy followed by Lloyds and RBS. Indeed, it has been a fairly similar: dispose of non-core assets that carry too much risk and provide too little profit, and instead focus on core assets that could help to turn the fortunes of the bank around. Although not yet complete, both banks are well into their turnaround plans and this could see them grow earnings in future years at a brisk pace.
Valuation
Despite being on course to hit profitability this year, both RBS and Lloyds seem to offer good value for money. For example, their respective price to book (P/B) ratios are very low at 0.4 and 1.4.
Furthermore, with the UK economy continuing to grow at a strong rate and the Scottish referendum result potentially unleashing greater investment moving forward, write-downs of assets are likely to continue their downward trajectory for both banks. This means that, while a low P/B ratio was justified at a time of huge write downs, the current valuations appear to be simply too low and may not stay low for too much longer.
As a result, RBS and Lloyds could enjoy much improved share price performance in 2014-15 and beyond. However, they’re not the only banks that could be worth buying. So, which others should you buy, and why?
