Royal Bank Of Scotland Group Plc & Lloyds Banking Group Plc: The Good, The Bad & The Ugly!

Wondering what to do about Lloyds Banking Group Plc (LON: LLOY) & Royal Bank Of Scotland Group Plc (LON: RBS) shares? Here are some points to consider.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The UK banking sector has proven an unforgiving place for investors so far into 2016. With concerns over the global economy, regulatory capital and balance sheet exposure to commodities driving a steep sell off during January and February, UK bank shares are now down by an average of -16.5% year to date.

After having covered many of the sector’s key constituents in February, now seems an appropriate time to take a quick look at Royal Bank of Scotland (LSE: RBS) and Lloyds Banking Group (LSE: LLOY), before results begin to emerge for the first quarter.

Worth holding onto

February’s results day will not have been the first time that RBS investors were caught on the wrong side of a collapse in the bank’s share price. The group has disappointed the market before and it still has a long way to go before it can close the book on a litany of issues stemming from the pre-crisis years.

Most notably, investigations into the securitization and sale of US mortgages could still cost shareholders billions, while the sale of PPI, interest rate swaps and the bank’s treatment of distressed customers in the UK could also add significantly to the final bill for past conduct.

However, looking past this, the majority of analysts agree that underneath everything else, RBS still has a pretty valuable personal and business banking franchise. Analysts at Berenberg estimate that this could be worth 19p-21p earnings per share annually.

Moreover, the eagerly awaited sale of Citizens Financial Group and Williams & Glyn, if either ever happens, will free up regulatory capital and enable management to focus more on the above core activities, which will be key to an eventual recovery of the shares.

In the meantime, expectations are about as low as they can get while the shares trade at just 0.67x tangible book value and 11x adjusted earnings per share, which is broadly in line with sector averages.

While it could still be some time before the shares stage a meaningful recovery, the aforementioned suggests that further downside could be limited from here and therefore, the shares may be worth clinging onto.

A watchful eye

Lloyds is another bank that has radically reorganised itself in recent years, shedding international exposure, in order to refocus itself on the domestic UK market for retail and business banking.

While a return to dividend payments was widely expected, management surprised everybody in February when they announced a higher than expected payout of 2.25p per share for the full year, in addition to a special distribution of 0.5p.

However, statutory earnings were just 0.8p for the period, thanks in large part to an increase in conduct related provisions. This means much of the dividend was paid from reserves, leaving the shares sat at an inflection point.

Investor expectations for dividend growth have risen since the results announcement but the bank will needs to reduce conduct costs and keep income steady if it is to even sustain the recent payout. If conduct costs show signs of rising again as the year progresses, either due to the approaching claims deadline for PPI or if the Plevin Case becomes a point of interest among ambulance chasers, investors could soon begin to doubt the bank’s ability to deliver.

As a result, conduct related news will require a watchful eye as the year elapses because developments here risk leaving investors disappointed. Nevertheless, most observers still seem upbeat in their outlook for the shares, while the average broker recommendation remains a Buy.  

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Skinner 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.

More on Investing Articles

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »