Weakness in Royal Bank of Scotlands (LSE: RBS) valuation suggests it may be time to add RBS to your portfolio instead of, say,Lloyds (LSE: LLOY), although UK banks arent particularly appealing right now and the entire sector was downgraded by French broker Exane BNP Paribas last week. In this context, Standard Chartered(LSE: STAN) could be the outlier if its chief executive Peter Sands leaves the bank and divestments speed up
Lloyds: Not Cheap Enough
The shares are down about 8% to 73p from the high they recorded in early December. Once again, latest reports suggest the bank is seeking permission from the Bank of England to resume dividend payments, but questions remain as to whether a low payout ratio is really going to be a game changer.
The bank is cutting jobs at a time the government is looking to trim its stake, which inevitably heightens the risk associated to Lloyds stock. Litigation risk is alive and well. A low-rate environment points to limited upside for net interest income and margins, so Lloydss relative valuation signals plenty of downside, with a possible price target closer to 60p than to 85p.
I would certainly be tempted to add exposure if the shares drop to 55p.
RBS And StanChart: In The Same Boat?
RBS and Standard Chartered are restructuring their operations. The former has managed expectations in the last 12 months, but the same doesnt apply to Standard Chartered, which not only has reported a slew of profit warnings but has also disappointed investors on several fronts, including corporate governance.
Since early December, Standard Chartered has lost almost 10% of value, and now trades at 880p. RBS has similarly destroyed value over the period, with its shares now changing hands at 363p. While I think the sell-off is likely overdue, I would be careful keeping a long position after a 14%/18% rise in either RBS and Standard Chartered from their current levels, however.
Upside Or Downside?
These banks may not promise solid returns, but in recent times they have done more to get their operations back on track. Of course, Standard Chartered still has to solve a leadership issue, which maysoon lead to the departure of its boss.
Standard Chartered said Monday it had fetched less than expected on certain divestments thats the right path to follow. RBS last week said it was planning to shut down or sell its DCM business in the Middle East and Africa. These measures are aimed at helping the banks domestic business in the long run.
In this note, we examine 5 issues (interest rate, regulatory dev., UK stress test, margins and political risk) we conclude in an increased pressure on UK bank earnings and capital and adjust our estimates and valuations accordingly, a note to investors from Exane BNP Paribas read on Thursday.
Other brokers may soon take heed
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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.