What a rollercoaster it’s been for UK bank investors in recent years. Between the credit boom, the credit crunch, the financial crisis and the subsequent recovery, the UK-listed banks has had more ups and downs than an EastEnders omnibus. But even on a much smaller time horizon — since the start of 2013 — the plot keeps unfolding in dramatic and unexpected ways.
The “narrative” of 2013 was dominated by Lloyds’ (LSE: LLOY) epic return to favour among investors. As the bank offloaded its complex operations and bolstered its capital, doubters and doom-mongers were slowly converted, and the bank went from “basket case” to “valuable business” in the eyes of the market. The turnaround in the shares was remarkable, too — Lloyds soared 58% in 2013; and even the government hit breakeven on its holding!
It was another story entirely at Barclays (LSE: BARC) (NYSE: BCS.US) and Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US), whose shares both underperformed the market last year, despite being similarly depressed to begin with. In 2013, it was clear that Lloyds had diverged from its rivals.
Lloyds is lending more, strengthening its balance sheet, and making huge steps to become an independent, sustainable, dividend-paying bank. That’s a trend that’s continued into 2014 — but unlike last year, Lloyds shares haven’t broken ahead of the pack.
In fact, since the start of May, Lloyds shares are down 6%, Barclays is down 5%… but RBS has gained by more than 8%, compared to a flat market. And many investors are beginning to wonder: is this an early sign it’s now RBS’ turn to diverge from its rivals?
It’s clear that RBS still has a lot of work to do in order to shore up its balance sheet, and to convince investors of its long-term viability. And while the UK government have been able to offload a large chunk of its Lloyds shares, it still seems there’s a long way to go before it disposes of its 81% stake in RBS. But these things once seemed like a distant prospect at Lloyds too — and the bank is targeting a 12% tier-1 capital ratio by 2016, which would restore RBS’ balance sheet to a similar state to Lloyds’ today.
It’s far too short a time period to consider whether RBS is really diverging from the pack — but one thing is clear; it’s very difficult to compare the all of three banks like-for-like. All three face very different challenges — and in the case of Barclays, geographies and economies too. In 2014 — maybe moreso than ever — these three banking shares offer very different propositions to investors.
Between a potential global break-up play at Barclays, a newly rejuvenated British mortgage lender at Lloyds and an outright turnaround required at RBS — I think we can expect all three businesses to offer divergent fortunes in the years ahead, for better or worse.
