We are seeing yet another probe into the banking industry by regulators, and the competition watchdog is warning that they could order a break-up of the big-four, Barclays (LSE: BARC), HSBC (LSE: HSBA), Lloyds (LSE: LLOY) and RBS (LSE: RBS), or at least a “radical shake-up of the sector”.
This latest probe, conducted jointly by Competition & Markets Authority (CMA) and Financial Conduct Authority, says there are enough concerns with the ‘big four UK banks’ to warrant a full-scale competition investigation. It reported key parts of UK banking lacked effective competition and failed to meet the needs of consumers or businesses.
Catch Us If You Can
A full enquiry could take 18 months and in a bid to side-step further scrutiny, The British Banker’s Association says there are already substantial changes under way. “Last month we published a series of ideas to help new banks set up and smaller players to grow. We hope these suggestions will be taken up by regulators and politicians.”
The industry has so far done the minimum to appease the regulators, who describe measures taken so far as being inadequate.
How Much Will It Cost?
The CMA said going further and imposing so-called structural remedies, such as forcing the break-up of banks, could be expensive, but it said the problems facing the sector were so serious and long-standing that it “cannot rule out the possibility that this may be may be necessary”.
Banks do not always come in easily detachable chunks, and the cost for taxpayer-backed Lloyds’ compulsory sale of branches, as ordered by European rules, is cited to have cost approximately £1.4 billion.
What Are The Sum Parts Worth To Shareholders?
The value of a bank can be determined by using the tangible book value. It is prudent to use the tangible assets value because if a business is broken up then there is minimal value in intangible assets, such as its brand, goodwill, intellectual property and reputation for any buyer.
| Lloyds | RBS | Barclays | HSBC | Standard Chartered |
|
|---|---|---|---|---|---|
| Market Cap (£bn) | 54.9 | 36.3 | 40.1 | 131.2 | 36.8 |
| Tangible Book Value (TBV) (£bn) | 39.2 | 53.9 | 47.2 | 99.2 | 25.0 |
| Price-to-TBV | 1.4 | 0.75 | 0.85 | 1.32 | 1.48 |
Source: Bank interim reports & Q3 updates as of 30 Sept 2013, market caps as of 6 November 2013.
“The low ‘price to book’ valuations we see today are the result of the uncertainty about the quality of the assets that make up book value.”
A low price-to-TBV ratio could mean that there is something is fundamentally wrong with the company. We know that the banks’ valuation remain depressed: HSBC, RBS, Lloyds and Barclays are trading on price to earnings (P/E) ratios of just 11, 13, 9 and 10 respectively, because they are damaged — investors remain reluctant to assign a full valuation until the scandal and fraud investigations abate, or until the challenges posed by increasing regulation and higher capital requirements are overcome.
