LONDON -- Are you perplexed by the banks' results? Suspicious of big improvements in "adjusted," "underlying," and "managed" performance when tucked away in the small print are large statutory losses? Join the club.
So last quarter, I decided to rigorously categorize the banks' adjustments between underlying and statutory profit. I identified one-off exceptional items, costs of litigation over PPI and LIBOR, etc., and fair value adjustments that arise from accounting technicalities.
If you're interested, you can read more about the methodology here, and see the detailed analysis in this table:
|
Lloyds |
RBS |
Barclays | ||||
|---|---|---|---|---|---|---|
| 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | |
| Underlying Profit | 2,607 | 638 | 3,462 | 1,824 | 7,048 | 5,590 |
| Exceptional Items | 840 | (435) | (1,787) | (4,078) | 227 | (1,419) |
| Litigation | (4,225) | (3,375) | (2,191) | (850) | (2,450) | (1,000) |
| Fair Value Adjustments | 208 | (370) | (4,649) | 1,914 | (4,579) | 2,708 |
| Statutory Profit | (570) | (3,542) | (5,165) | (1,190) | 246 | 5,879 |
The bottom line
But you can skip to this table that summarizes the results:
|
Lloyds |
RBS |
Barclays | ||||
|---|---|---|---|---|---|---|
| 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | |
| Underlying Profit | 2,607 | 638 | 3,462 | 1,824 | 7,048 | 5,590 |
| Statutory Profit Before Fair Value Adjustments | (778) | (3,172) | (516) | (3,104) | 4,825 | 3,171 |
The underlying profit shows the results as the banks would like you to see them, and may be a better indicator of future performance. The bottom line is what actually happened, adjusted to eliminate misleading accounting technicalities.
Both measures show significant improvement over last year. On the warts-and-all measure, Lloyds (LLOY -2.85%) and RBS (NWG -2.89%) (NWG -1.59%) have made big reductions in losses, while Barclays (BARC -2.54%) (BCS -1.75%) enjoyed a muscular 52% rise in profits.
Lloyds
Lloyds' management sounded bullish. The bank is ahead of its transformation plan, reducing costs by 5%, two years ahead of target, and selling over 40 billion pounds of distressed assets in 2012 against a plan of 25 billion pounds.
With a concentration on U.K. retail and commercial banking, Lloyds has the lowest risk business model of the three banks, but one wholly dependent on the U.K. economy. That's not a great short-term bet, but the long-term trajectory is upwards.
With the heavy lifting on its transformation nearly complete and PPI provisioning at an end, Lloyds shares are trading at 95% of tangible net asset value (TNAV). The prospect of a resumed dividend will give them their next big push.
RBS
RBS's results announcement was also confident, predicting 2013 to be the last big year of restructuring. In 2012, it pulled off the flotation of Direct Line and shed over 10% of risk assets. As with Lloyds, the EU-mandated sale of branches stalled.
RBS is harassed by politicians with agendas, but that could yet turn to its advantage, with the Coalition eager for demonstrable progress before the next election in 2015. CEO Stephen Hester is making positive noises about privatization.
A partial flotation of the U.S. Citizen's Bank could prove a valuation boost this year. Trading at 0.7 times TNAV, RBS has more headroom for rerating.
Barclays
Barclays' results were accompanied by details of its new strategy, and greeted by a near-10% jump in the shares.
The bank will focus on the U.K., U.S., and Africa, and is cutting jobs in investment banking, Europe, and Asia. The sole closure is that of the toxic tax-structuring unit. It will invest in high-return businesses such as U.K. mortgages, its Wealth business, and Barclaycard -- an often-overlooked gem.
It's also committed to accelerate its dividend from next year, targeting a 30% payout. Trading at 0.8 times tangible NAV, Barclays may be undervalued.
Growth
There's a reasonable growth story behind all the banks, and they have put most of their self-inflicted risks behind them: the wild speculations in derivatives and over-exuberant lending, and the rule-breaking that came back to bite.
But they're more vulnerable than most companies to a blow-up in the eurozone, the risk that markets forget when they're bullish and panic over when they're bearish.
If you're interested in a growth story with a lower risk profile, I recommend you read about this company. It has survived bigger changes in its industry than the banks have undergone, yet it hasn't made a capital call on its shareholders in over 70 years. It has increased or held its dividend every year since at least 1988. That's consistency.
Its earnings per share have gone up by 44% since 2009, and there could be considerable value that isn't reflected in the share price. That's why it's been chosen as "The Motley Fool's Top Growth Stock for 2013."
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