History buoys

29th July 2011 by The Value Perspective

By Nick Kirrage.

When a company’s share price is struggling, it is often instructive to look back to when it first hit the current level. In the case of Barclays, Lloyds and Royal Bank of Scotland (RBS), whose share prices have now been suffering collateral damage from the latest round of banking stress-tests, that was in the early part of 2009 and, despite the ongoing grim headlines concerning sovereign debt, it would still be fair to say the world today looks very different to how it did back then.

In that time, the UK banks have been through a couple of years of soul-searching, auditing, business recovery and capital generation – not to mention some significant management changes. Obviously there are real concerns at present, particularly the fate of Greece and, while there are some  increasingly innovative solutions being floated by various parties, nobody knows what is going to happen there.

Although Barclays, Lloyds and RBS do not have much exposure to Greek debt – as we have argued before, for example, in Paper view – the fear in the market is tangible, as evidenced by the trio’s share prices. They may have underperformed and they may have been a painful investment over the course of the last quarter – yet, looking at the fundamentals, very little has actually changed.

This means that, on a risk-adjusted basis, the shares of Barclays, Lloyds and RBS are more attractive today than they were three months ago and a lot more attractive then they were in early 2009, when they were far less well-capitalised, government support had yet to be secured and the outlook for the whole world was much more uncertain.

Lloyds has even felt sufficiently comfortable with its capital base to announce it will pay a dividend as soon as it is able. Legally the group is allowed to do so in nine months’ time although that may not be acceptable politically while, financially, it may still want to see how the world looks nearer the time. Nevertheless, it is a fair statement of intent.

Put simply, the share prices of Barclays, Lloyds and RBS may be the same as they were two and a half years ago but they are now much better businesses and importantly, much better capitalised businesses. The headlines may feel just as bad but the headlines at the beginning of 2009 were about the end of the world and today they are about the end of Greece and some other peripheral nations. With the greatest of respect to Greece, things are moving in the right direction.

by Kevin Murphy
Schroder Specialist Value UK Equity team and co-manager of the Schroder Recovery Fund since 2006.

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