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UK Banks
Clawback
Government involvement in the UK banking system should ensure an orderly
deleveraging of the private sector while allowing the banks to avoid forced
selling. Equity book value/share grows as a result, most powerfully at Barclays,
but political involvement will come at a price. We don’t rule out windfall taxes.
Table 1 : Key recommendations & forecasts
Tgt Diff Mk to mkt TCE P/mk to mkt TCE EPS P / E
£ Rec Price Price (%) FY09F FY10F FY11F FY09F FY11F FY09F FY12F FY12F
Barclays Buy 2.25 3.00 33 1.90 2.18 2.55 1.2 0.9 0.27 0.49 4.6
HSBC Sell 4.60 4.00 -13 2.73 2.99 3.41 1.7 1.3 0.34 0.80 5.8
Lloyds* Sell 0.98 0.85 -13 0.61 0.67 0.88 1.2 0.9 -0.06 0.12 6.0
*Lloyds target price includes value of open offer
Source: Company data, ABN AMRO forecasts
Private sector deleveraging and continued dependency on political support
RBS economists expect disappointingly flat GDP through 2H09 and FY10F as the private
sector prioritises lower debt before consumption. Likewise, the RBS credit strategists believe
that the cyclical wide in credit spreads has yet to come given the unusually protracted pain in
the US housing market. They take this as a reasonable indicator of what to expect for the
rest of the US economy for the next couple of years.
Barclays’ book value per share growth significantly outpaces Lloyds and HSBC’s
Lloyds aside, we estimate the UK banks will all report a profit this year. More importantly,
Barclays looks set to deliver a 28% uplift in marked-to-market TCE. Progress at Lloyds and
HSBC is much more muted on this front. The difference is largely due to business mix –
Barclays looks well positioned to benefit from strong capital market revenue vs Lloyds and
HSBC, which are more exposed to the two prevalent sources of disappointment that we
expect for this year. These are: 1) lower UK net interest income, as back-book mortgage
rates are falling faster than rates for sight deposits. Combined with a mix shift towards lowerrisk
assets and a 150-250bp increase in term wholesale funding costs, we think these will
more than offset the beneficial impact from wider new loan spreads. 2) Most credit market
risk prices are down ytd and impairments from property-related lending and consumer credit
are rising sharply. To be fair, credit availability has notably improved for investment-grade
corporates, and the debt maturity profile of US and European loans implies that repayment
risk and resultant defaults may well be staggered through to 2012-13.
Buy Barclays, Sell Lloyds and HSBC
New world profitability is likely to be significantly impacted by balance sheet leverage.
Further capital-raising at Barclays cannot be ruled out, but at least it would be from a position
of near-term earnings strength. We estimate Lloyds will emerge from the bad debt cycle with
a capital surplus of £10bn, but we would not be surprised if a large chunk of this were
retained by tougher regulatory requirements or reclaimed by a windfall tax rather than
distributed to shareholders. We upgrade Barclays from Sell to Buy (TP: £3.00, from £1.10);
downgrade Lloyds from Hold to Sell (TP: £0.85, from £1.05); and maintain HSBC at Sell (TP:
£4.00, from £4.50).
Contents
A whole new world 3
Credit availability for good borrowers has improved, but the impairment cycle remains
ugly. Book value rebuild varies but looks strongest at Barclays. We expect new world
ROE and valuations to be constrained by government quid pro quo for saving the
banking system.
In more detail 9
This section sets out the key drivers as we see them behind the three most
important drivers of sector TCE, profitability and valuation multiples: top-down
macroeconomic outlook; pre-impairment profit trends by business mix; and
cumulative losses by product.
Cross asset class starting point 9
Pre-impairment profit generation 10
Embedded cumulative losses 16
Appendix 21
Here we set out in more detail the principal financial forecasts and changes since
our previous estimates for each bank.
Company profiles 24
Barclays 24
HSBC Holdings 26
Lloyds TSB 28
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