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Broker snap: JPM sizes up RBS, Lloyds TSB and Barclays
Mon, 01 Dec, 2008
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Broker snap: JPM sizes up RBS, Lloyds TSB and Barclays
Tue, 14 Oct 2008, 10:22:00
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Related Market Prices
Name
Value
Percent
Change
Royal Bank of Scotland Group
50.80p
+7.17%
Barclays
146.50p
+9.98%
HBOS
86.00p
+17.33%
Lloyds TSB Group
147.60p
+18.36%
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US bank JP Morgan has described the UK government's rescue package for the UK banking industry as a "step in the right direction" that has highlighted the seriousness of the problem.<br /><br />JP Morgan (JPM) retains its underweight rating on <b>Royal Bank of Scotland</b> (RBS) with a price target of 120p after RBS launched a higher cash than anticipated.<br /><br />The size of the fund raising, at £20bn, raises questions about increased impairments, JPM says. <br /><br />The level of government ownership could reach almost three-fifths if existing shareholders elect not to take up their rights to new shares and if this scenario emerges then this would lead to "significant shifts in the business model and on our estimates returns are below cost of equity."<br /><br />JPM estimates a return on equity of 8.7% for 2009, the lowest in the UK banking sector.<br /><br />The US bank estimates RBS's net asset value at 101p which, at current prices, gives the appearance of some upside but "uncertainty surrounding commitment to maintain lending at 2007 levels and high likelihood of further charges ... implies the risk reward is not immediately compelling," JPM concluded.<br /><br />A combined <b>Lloyds TSB</b>/<b>HBOS</b> entity also gets the thumbs down from JP Morgan. <br /><br />Trading on a capital adjusted price earnings ratio (PER) of 10.1 times estimates earnings for 2009, and with a potential government stake of 44% "raises question marks over strategic direction and expecting no merger revenue attrition is a big ask," JPM says.<br /><br />JP Morgan keeps its Lloyds TSB/HBOS target price at 280.<br /><br /><b>Barclays</b> is trying its best to raise money without recourse to the government and JP Morgan believes this is "vital for the survival of Barclays."<br /><br />"Capital ratios remain stretched and on our estimates there is still a £7bn deficit," JPM said.<br /><br />According to JP Morgan's 2009 estimates, Barclays is trading on a capital adjusted PER of 11. "With a net asset value of 214p and an expected return on equity of 11.9%, Barclays is taking a big bet that its asset quality is far superior to its peers, but if it does pay off this put it in a structurally better position" than its peers. <br /><br />JPM's price target of 210p for Braclays remains unchanged.
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