We live in a new era of Austerity Britain.
One must make cutbacks and maximise value where one can.
So, then. Not just when — but how– should the UK government sell off its stakes in Lloyds and RBS, probably some time next year?
Ahead of both banks’ H1 results, Seymour Price’s Bruce Packard has come up with a rather philosophical answer.
Stoic, even:
We have looked at the disposal of Government stakes in banks after the banking crises in Norway and Japan. In Japan, Private Equity played a role in producing a quick turnaround, at the expense of long term value destruction we believe. In Norway, the Government wasn’t prepared to sell stakes in a thin market and held on for half a decade and sold when it became clear that returns were sustainable. We also suggest that it may be better to break up banks given that there are a very limited number of buyers that could afford to take the place of the UK Government.
It’s all about long-term value — which isn’t there at the moment, Packard believes.
Quite. Seymour Pierce have renewed their sell rating on both banks, targeting RBS from 45p to 36p and Lloyds from 62p to 41p. As Packard continues, emphasis ours:
The insidious part of shareholder value is that by applying a double digit discount rate to the future, it can be used justify both short term behaviour and/or an aggressive capital structure. Applying a steep discount rate creates a culture of poverty, we believe. Currently, we feel that pressure to generate an earnings recovery may be crowding out longer term value creation at LLOY and RBS. This is not the fault of management at RBS and LLOY, they appear to have been given conflicting goals and like Buridan’s ass are mid way between a stack of hay and a pail of water.
In the meantime, the Japanese and Norwegian precedents for government bank sales don’t look promising. The Japan one — LTCB’s sale in 2002 to JC Flowers and 2004 IPO as Shinsei — speaks for itself, but needless to say the price fell 92 per cent peak to trough after the first day, Packard observes. Not much zen in rushing, in short.
Meanwhile, Norway hung on for years before it sent DnB back to market, taking even longer to reduce its stake. Even then, Norwegian banks were minnows relative to UK lenders’ size today — another argument for break-up, Packard notes — and Norway’s government didn’t find itself under the sovereign debt spotlight. Unlike Britain and its liabilities for bailed-out banks.
Bit of a dilemma, isn’t it?
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We can remember it for you wholesale
So how do you go about long-term value creation, then?
For one thing — deposits. Packard’s not happy here though — on the view that all the customer loyalty guff in UK banks’ new branding will backfire when they have to be nasty to depositors who verge into the red. That might leave deposit growth less sticky in the long term.
And when it comes to the future of UK banks’ wholesale funding:
Ideally we think banks should be split up. But even if this doesn’t happen both Lloyds and RBS need to reduce their reliance on Wholesale Banking… Lloyds particularly, is often seen as a play on UK mortgage margins. But Total Income from Mortgages and Savings was just £3.7bn in 2009 less than half the £8.9bn in Lloyds Wholesale Banking division…
We understand the argument that last year impairments in Wholesale Banking were at a cyclical high, and that as impairments fall there is potential for a huge uplift in profitability. But that assumes revenue is sustainable. [See chart below, click to enlarge:]
And well, revenues of that size probably aren’t. But we’d point out that Lloyds in particular won’t be able to walk away from wholesale funding markets for a while, given liabilities it will have to finance while trying to restructure its balance sheet.
So how do you sell one of Her Majesty’s Banks these days? Answers on a postcard.
Related links:
Buridan’s ass – Wikipedia
The banking ‘miracle’ – debunked – FT Alphaville
Deconstructing the ‘buy’ case on Britain’s banks – FT Alphaville