LONDON — Thomas Moore is an investment director at Standard Life Investments. I recently spoke with Moore to understand why he believes these three bank shares are a good bet.
All three have had a great 12 months. In the last year, shares in Barclays PLC (ADR) (NYSE:BCS) are up 46.2%. Lloyds Banking Group PLC (ADR) (NYSE:LYG) is up 80.7%, and Royal Bank of Scotland Group plc (ADR) (LSE:RBS) is ahead 22.3%.
Yet, Moore believes further rises are ahead. “The banks have largely erased their capital deficits. They can no longer be accused of having a capital shortfall. In the case of Lloyds Banking Group PLC (ADR) (NYSE:LYG) and Royal Bank of Scotland Group plc (ADR) (LSE:RBS), there were large non-core assets that have had to be worked off. The stronger economic environment will help with this immensely. Reasons for these stocks to trade at a discount are disappearing quarter by quarter.”
The politics
Considerable political heat has been turned on the banks since the credit crunch. This hasn’t just been the media — government ministers have also attacked them regularly. This has included calls for tighter controls on staff pay, more regulation and big changes in the way that the banks operate. None of this has been good for share prices. However, there are signs that such pressures are now easing. There is now little political capital to be made from bank-bashing.
“Regulatory pressures are easing,” says Mr Moore. “There are clearly no serious capital problems among the listed banks. It is now in politicians’ interest to see that the government stakes in Lloyds Banking Group PLC (ADR) (NYSE:LYG) and Royal Bank of Scotland Group plc (ADR) (LSE:RBS) are returned to private ownership. Their interests are now aligned with shareholders’ as the taxpayer needs to recoup its losses. To achieve this, there has to be an understanding that the banks must be allowed to get back to making profits.”
Barclays PLC (ADR) (NYSE:BCS)
“Barclays PLC (ADR) (NYSE:BCS) is a company that the U.K. should be proud of,” says Moore, “The company has great pedigree, built over more than one hundred years. Today, Barclays PLC (ADR) (NYSE:BCS)’s core operations deliver returns well in excess of the bank’s cost of capital. The LIBOR scandal and chief executive Bob Diamond’s departure were a great a buying opportunity.”
Barclays PLC (ADR) (NYSE:BCS) shares currently trade at 8.6 times broker forecasts for 2013. That’s significantly below the price-to-earnings (P/E) ratio of 11.6 that HSBC Holdings plc (ADR) (NYSE:HSBC) enjoys. Barclays PLC (ADR) (NYSE:BCS) is forecast to increase its dividend 11.3% this year, followed by a huge 28.7% rise for 2014. The forecast earnings and dividend growth mean that the shares are available today on a 2014 P/E of just 7.2 times analyst estimates, with the prospect of a 3% dividend yield.
Lloyds Banking Group PLC (ADR) (NYSE:LYG)
Lloyds Banking Group PLC (ADR) (NYSE:LYG) has put in a better share price performance than Barclays PLC (ADR) (NYSE:BCS) and RBS 2013. In the last month alone, the shares are up 21.1%. A large amount of this rise was inspired by the bank’s recent Q1 results. Lloyds Banking Group PLC (ADR) (NYSE:LYG) reported a big fall in impairments, no further PPI compensation provision and a profit before tax of more than £2bn.
On Lloyds Banking Group PLC (ADR) (NYSE:LYG), Mr Moore says: “Of the three, Lloyds is running down its non-core book fastest. As the bank has demonstrated a return on equity greater than its cost of capital, the discount to book value has closed.”
Royal Bank of Scotland Group plc (ADR) (LSE:RBS)
For my money, Royal Bank of Scotland Group plc (ADR) (LSE:RBS) has the greatest upside potential from here. The bank currently trades at a discount to net tangible asset value of more than 50%. If management can prove a turnaround, the possible gains are huge. If Royal Bank of Scotland Group plc (ADR) (LSE:RBS) can return to paying a dividend, this should then inspire further rises.
“Royal Bank of Scotland Group plc (ADR) (LSE:RBS) has become a much more focused bank” says Moore. “Any future dividend payment would force a rerating according to that yield. The shares would then be treated by the market just like any normal company.”
Words of caution
Investing in these banks is not without risk. As Moore says, “they are among the most highly geared companies on the markets today. The future of the UK’s banks is inextricably linked with the wider economy.”
The article Why This Fund Manager Is Backing Barclays, Lloyds Banking, and Royal Bank of Scotland originally appeared on Fool.com.
David owns shares in Barclays, Lloyds Banking Group and Royal Bank of Scotland. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
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