With signs arising that the UK’s largest banks are finally turning a corner, is now your best opportunity to find bargains at Lloyds (LSE: LLOY), RBS (LSE: RBS) and Standard Chartered (LSE: STAN)?
Lloyds has progressed much quicker than other UK banks in cutting risky assets, raising capital and refocusing on its core domestic retail banking. This focus on the domestic market has paid off as the bank’s return-on-equity is a very healthy 15%, underlying profits for 2015 rose to £8.1bn and dividends more than doubled.
These progressive dividend payouts will be the main attraction for investors going forward as domestic lending won’t lead to runaway growth. Dividends have considerable space to grow in the future as the bank has met its core capital buffer requirements and PPI claims payments could end as soon as 2018.
Shares are currently trading at 9.6 times forecast 2016 earnings and will provide a 6% dividend that’s twice covered by earnings. The bank’s price/book ratio is now 1.01, suggesting there won’t be high growth in the future. However, I believe a low-risk business model, high profitability and rapidly increasing dividend are reason enough to consider buying Lloyds and holding it for years.
Could do better
If Lloyds is the healthiest of the UK’s large banks, Standard Chartered is certainly in the running for weakest. The emerging markets-focused lender posted 2015 underlying losses of $834m as revenue fell 15%. A large part of this was due to the bank writing down $4bn in loan impairments as companies from Brazil to India felt the pain of weakening currencies and faltering economies.
Non-performing loans for the year rose 70% and could continue rising through this year as emerging markets continue to struggle and commodities companies, which constitute 8% of loans, falter. These problems forced the company to slash dividends by more than 80% in order to retain capital and hopefully forestall the need for another rights issue.
The broader problem for Standard Chartered is that in the run-up to the commodities crash it handed out too many risky loans, and new management will have to spend several years cleaning up the mess before any turnaround can occur. These myriad issues will constrain share prices for some time, and I see little reason to consider Standard Chartered a bargain at today’s prices.
More red ink
RBS is following the path blazed by Lloyds and is exiting investment banking and sprawling global operations to focus on domestic lending. However, like Standard Chartered, the company is still cleaning up the mess left in the wake of the Credit Crisis.
A £2bn loss in 2015 was the company’s eighth successive year in the red. Despite this staggering loss, the underlying business looks increasingly sound. Return-on-equity for the whole bank was 11% and capital buffers were high enough to allow an early return to dividend payments.
Current share prices have the bank valued at a mere 0.24 price/book ratio, which leaves considerable growth potential as regulatory fines end and non-core assets are sold off. At this very low valuation, I believe RBS could be an intriguing option for long-term investors.
