Barclays (LSE: BARC) (NYSE: BCS.US) stock is dirt cheap. Royal Bank of Scotland (LSE: RBS)(NYSE: RBS.US) is getting traction, and its equity valuation is enticing. Lloyds (LSE: LLOY) is the best bank in the UK, so its shares are a bargain.
Does that all sound familiar? If it doesn’t, you haven’t read much equity research in recent times.
Is It Just Me?
As you may know, I am not a big fan of banks at this point in the business cycle. More stringent capital requirements, litigation risk and uncertainty surrounding the macroeconomic outlook all weigh heavily on their equity valuations. Their bonds don’t look attractive, either. Even if interest rates rise, one-off charges will remain problematic and I’d expect more pressure on earnings as restructuring plans take time to boost returns.
But have the shares of these three banks really bottomed out? Let’s look at their recent performances in the public market.
Barclays: If It Looks Like A Duck…
The shares of Barclays change hands at 219p. The price is in line with the level they recorded soon after “dark pool” fraud allegations emerged on 26 June. They have lost 19.5% of value in 2014.
Barclays shares would be a nice addition to a properly diversified portfolio only if they dropped below 200p, in my opinion. That’s a distinct possibility. Unless a major management shake-up occurs, which is unlikely, I struggle to see why the shares shouldn’t go lower before they go higher.
A sum-of-the-parts analysis indicates that Barclays stock may be worth 250p, but that’s stuff for analysts. And even then, upside would be limited. Several risks pose a serious threat to earnings and core capital ratios.
Royal Bank of Scotland: Out Of The Woods?
R
BS is not out of the woods, but its restructuring plan is working, in my view. The Wall Street Journal reported on Friday that the IPO of its Citizens Bank has been pushed back, which is a good thing, in my view.
RBS stock is up 2.7% this year. It has greatly outperformed Barclays stock during the period, and it has also fared better than HSBC’s (-1.26% year-to-date), Lloyds’s (-7.1%) and Standard Chartered’s (-9.5%).
RBS shares shot up 13% when the bank pre-announced second quarter results at the end of July and, as I suggested back then, they may offer more upside to the end of the year. That depends on a series of factors, including impairments and the speed at which RBS’s investment in on-line banking pays dividends. The shares trade at 349p; a bet in the region of 330p would make a lot of sense.
Lloyds: When The Bad News Is Good News
“Treasury rules out a public share sale in Lloyds Banking Group before next year’s general election due to stock market volatility,” the Guardian reported this week.
It’s way too easy to blame market volatility when things go wrong, but this isn’t bad news for shareholders and it doesn’t change the investment case, in my view. Lloyds’ shares trade around a level at which the taxpayer may have to record a paper loss if the stake held by the UK government were sold down, and there are other priorities.
The bank has shown a commitment to de-risk its balance sheet by selling assets and buying back enhanced capital notes this year. It may become a bargain at around 55p a share.
Overall, RBS is my favourite pick in the space.
