Royal Bank of Scotland (RBS)
 

Overview
Royal Bank of Scotland (RBS) is a provider of financial products and services in the UK and Abroad. RBS has many brands under its name such as Child & Co., Coutts, NatWest, Lombard, Holt’s etc. and few are even older than the Royal Bank itself. The group came into existence in the year 1727 & is headquartered in Edinburgh, the United Kingdom. The company's total outstanding market capitalisation stood at £32.39 bn and dividend yield stood at 2.22% (as on March-25-2019).

Financial Results and Review – Financial Year 2018 (£, million)

(Source: Annual Report, Company Website)
 
In the Financial year 2018, Royal Bank of Scotland reported a Net interest income of £8,656 million in the financial year ending December 2018 against £8,987 million for the previous year of the same period. There is a decrease of 3.7 per cent due to an increase in the interest expenses for FY2018. The Non-interest income stood at £4,746 million in FY2018 as compared to £4,146 million in FY2017. The reported Total income for FY2018 was £13,402 million as compared to £13,133 million in FY 2017. The reported Operating profit before Tax was £3,359 million as compared to £2,239 million in FY2017. There was an increase of 50 per cent due to a significant decrease in the operating expenses of the company as compared to the previous year. Profit for the year stood at £2,084 million in FY2018 as compared to £1,415 million in FY2017.
 
Share Price Performance

Daily Chart as at Mar-18-19, before the market close(Source: Thomson Reuters)
 
On 18th March 2019, at the time of writing (before market close, GMT 11:36 AM), Royal Bank of Scotland Plc shares were trading at GBX 273.80, up by 1.86 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 297.40/GBX 200.10. At the time of writing, the share was trading 7.97% lower than its 52w High and 36.83% higher than its 52w low. Stock’s average traded volume for 5 days was 17,324,172.20; 30 days - 16,615,148.13 and 90 days - 16,503,374.69. The average traded volume for 5 days was up by 4.27% as compared to 30 days average traded volume. The company’s stock beta was 0.77, reflecting lower volatility as compared to the benchmark index. The outstanding market capitalisation was around £32.39 billion.

Valuation Methodology

Note: All forecasted figures have been taken from Thomson Reuters.

Conclusion
The company had shown good financial growth as compared with the previous year. There had been strong growth among different brands of the company. Overall there has been a significant decrease in the operating expenses of the company. The current trading level indicates the stock movement towards higher levels. Based on the strong growth prospects of the company and the valuation done using the above method, we have given a BUY recommendation at the closing price of GBX 268.80 (as on 15th March 2019) with single-digit upside potential based on 0.87x NTM Price to Book value on FY19E Book value.
 

LLOYDS BANKING GROUP PLC (LLOY)

Overview
Lloyds Banking Group Plc (LLOY) is a high street London based lender, offering wide ranges of banking and non-banking services primarily in the UK. Its services portfolio consists of current and savings accounts, credit and debit cards, short and long-term loans, unsecured loans, mortgages, protection, investment products, motor finance, bonds and syndicated loans. They are also engaged in offering wealth management services, capital market services, foreign exchange, private equity and leasing services. The company shares are traded at the London Stock Exchange and part of the FTSE 100 benchmark index. The company total outstanding market capitalisation stood at £46.18 bn and dividend yield stood at 5.15% (as on March-25-2019).

 
Financial Results and Review – Financial Year 2018 (£, million)

(Source: Annual Report, Company Website)
 
The company reported net interest income of £13,396 million for the year ending December 2018 as compared to £10,912 million in 2017 for the same period. The company’s total income declined to £22,091 million in FY2018 as compared to £34,237 million in FY2017. There was a decrease of 35.5 per cent due to lower levels of client markets activity. In FY18, profit before tax surged by 13 per cent to £5,960 million against £5,275 million reported last year. Profit attributable to equity holders climbed by 24.4% during FY18 to £4,302 million from £3,457 million in FY17, due to the decrease in the tax expense charges and improvement in performance. The company’s basic earnings per share were 5.5 pence in FY2018 as compared to 4.4 pence in FY2017. Cash and balances at central banks dipped by 6.6 per cent to £54,663 million, down from £58,521 million a year ago, due to low maintenance in the balance sheet and lower performance in trading. In 2018, reported total assets was down by £13,584 million to £797,598 million against £811,182 million reported last year. Lloyds reported total equity excluding non -controlling interest of £49,925 million for FY18, up by 4.6 per cent against its FY17 reported total equity. A special ordinary dividend per share of 3.21 pence was declared, and total DPS increased by 5.2% to 3.05 pence.
 
Share Price Performance

Daily Chart as at Mar-18-19, before the market close(Source: Thomson Reuters)
 
On 18th March 2019, at the time of writing (before market close, GMT 12:10 PM), Lloyds Banking Group Plc shares were trading at GBX 65.98, up by 1.75 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 69.69/GBX 49.52. At the time of writing, the share was trading 5.32% lower than its 52w High and 33.24% higher than its 52w low. Stock’s average traded volume for 5 days was 168,481,356.00; 30 days - 140,980,296.40 and 90 days - 158,524,006.10. The average traded volume for 5 days was up by 19.51% as compared to 30 days average traded volume. The company’s stock beta was 0.69, reflecting lower volatility as compared to the benchmark index. The outstanding market capitalisation was around £ 46.18 billion.

Valuation Methodology

Note: All forecasted figures and peers have been taken from Thomson Reuters

Conclusion
The company will have to remain watchful from political and economic uncertainties around the world. Rising interest rate can help the company to improve its margins but can decrease demand for loan. Based on the strong growth prospects of the company and the valuation done using the above method, we have given a BUY recommendation at the closing price of GBX 64.84 (as on 15th March 2019) with single-digit upside potential based on 1.1x NTM Price to Book value on FY19E Book value.

*The buy recommendation is also valid for the current price as covered in the report (as on Mar-18-19).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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