Lloyds Banking Group Plc

Lloyds Banking Group (LLOY) was formed in January 2009 following the acquisition of HBOS. It is the UK’s largest retail bank with a good market share. It also has a major presence in UK commercial and corporate banking. Other activities are general insurance and life, pensions and investments and small international banking business.

Financial Highlights (FY2018, £million)

(Source: Annual Presentation, Company Website)

The company reported net interest income (underlying basis) of £12,714 million for the year ending December 2018as compared to £12,320 million in 2017 for the same period. The company’s total income declined to £22,091 million in FY2018 against the £34,237 million in FY2017. There was a decrease of 35.5 per cent due to lower levels of client markets activity. In FY18, statutory profit before tax surged by 13 per cent to £5,960 million as 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 the operating 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. Total equity excluding minority interest stood at £49,925 million for FY18, up by 4.6 per cent against its FY17 reported total equity. In FY18, the total ordinary dividend per share was reported at 3.21 pence.

Share Price Performance

Daily Chart as at April-24-19, before the market closed (Source: Thomson Reuters) 

On 24^th April 2019, at the time of writing (before the market close, GMT 11:56 AM), LLOY shares were trading at GBX 65.31, down by 0.39 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 68.73 /GBX 49.52. The company’s stock beta was 0.70, reflecting the lower volatility of the stock as compared to the benchmark index.

Valuation Methodology


Conclusion
The company is planning for the UK’s take-off from the EU to provide continuity for all the clients in the UK and Europe. As Lloyds operates the largest digital bank in the UK with a decent market share, the company’s incremental benefits of group cost reduction and savings recycling into further investment contributes towards a cycle of a lower cost/income ratio. Increasing interest in developed markets will help the bank to improve its interest margin but weakening economic data does not augur well for it. The company will have to remain watchful from political and economic uncertainties around the world. The rising interest rate can help the company to improve its margins but can decrease the demand for loan. The company will be facing macro headwinds due to Brexit uncertainties in the near term. Based on the above rationale and supported by valuation done using the above method, we have given a “Hold” recommendation at the closing price of GBX 65.57 (as on 23^rd April 2019).
 

Royal Bank of Scotland Group Plc

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 company's operations are differentiated in four operating segments: Personal & Business Banking (PBB), Commercial & Private Banking (CPB), RBS International (RBSI), and NatWest Markets.

Financial Highlights (FY 2018, £million)

(Source: Annual Report, Company Website)

While total income increased by £269 million, or 2.0 per cent, the company reported an operating profit before tax of £3,359 million in FY18, rising from £2,239m reported in FY 2017. Profit attributable to shareholders also rose from £752m in 2017 to £1,622m in 2018, representing a more consistent financial performance. Improvement in profitability was driven by stable income generation as well as by de-risking the balance sheet further and reducing operating costs. Amid ultra-loose monetary policy, the net interest margin reduced from 2.13 per cent in FY17 to 1.98 per cent in FY18. Though the cost to income ratio decreased to 71.7 per cent, it was still very high then the company's long-term target of achieving below 50 per cent. Basic earnings per share increased to 13.5 pence and return on tangible equity stood at 4.8 per cent. This financial year, the company paid its first dividend in a decade with an interim dividend of 2 pence per ordinary share. Subject to shareholders approval, the company will pay a final dividend per share of 3.5 pence and a special dividend per share of 7.5 pence.

Share Price Performance

Daily Chart as at April-24-19, before the market closed (Source: Thomson Reuters) 

On 24^th April 2019, at the time of writing (before the market close, GMT 1:00 PM), RBS shares were trading at GBX 257.90, down by 0.73 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 288.98/GBX 194.44. The company’s stock beta was 0.78, reflecting the lower volatility of the stock as compared to the benchmark index.

Valuation Methodology


Conclusion
Management has guided to £300m of underlying cost savings in 2019. RBS funding and capital plans emphasis on issuing £3-5bn of MREL issuance with strong demand, particularly from US institutions. The company had shown good financial growth as compared with the previous year.It has made continued progress in building a stronger and safer bank, which was reflected by the company's first dividend paid in a decade. This also shows that the company is capable of delivering better returns for stakeholders. As the government undertook a further sell-down of its majority stake in the bank, the company made further progress in its journey towards a return to private ownership. Moreover, the group resolved some major legal issues, including the US Department of Justice investigations. The current trading level indicates the stock movement towards higher levels. Based on the above rationale and supported by valuation done using the above method, we have given a “Hold” recommendation at the closing price of GBX 259.80 (as on 23rd April 2019). 
 
*All forecasted figures and peers have been taken from Thomson Reuters.

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