LONDON -- It's more than five years since Royal Bank of Scotland Group (LSE:RBS) (NYSE:RBS) and Lloyds Banking Group (LSE:LLOY) were bailed out by the British taxpayer -- and Barclays (LSE:BARC) (NYSE:BCS) narrowly avoided the same fate by raising 7 billion pounds from investors in Qatar and Abu Dhabi.
Today, RBS is still more than 80% taxpayer-owned, and the taypayer's stake in Lloyds stands at 39%. Meanwhile, Barclays has joined the ranks of the rank-smelling banks after a series of scandals, the latest of which concerns allegations that Barclays' Middle East rescuers were loaned money to invest in the bank by Barclays itself.
All three banks still have a long way to go to repair their reputations and businesses. After their recent annual results, which of the three offers investors the best value?
Let's start with the key numbers used by classic value investors: discount to tangible net asset value (TNAV), price to earnings (P/E) ratio, and dividend yield
|Share Price||TNAV Per Share||Discount to TNAV||Forecast P/E 2013||Forecast Yield 2013|
For a simple overview, if we rank the banks on the three value measures, with one being the best value and three being the worst, we get: Barclays 2, 1, 1; Lloyds 3, 2, 2; and RBS 1, 3, 3. On this basic test of relative value, Barclays stands head and shoulders above its rivals.
For some value investors, the fundamental numbers are all that count, and such investors would declare Barclays the best value without going any further. But let's go a bit further and see where it takes us.
The banks have been slimming down their businesses by disposing of non-core assets. The affect of these disposals on the balance sheet can be positive or negative, as Lloyds and RBS demonstrated just last week.
Lloyds sold part of its shareholding in FTSE 250 wealth manager St James's Place for around 500 million pounds, adding 1.7 pence a share to TNAV -- bringing the end-of-year number in the table above up to 56.6 pence and the discount to 11%.
RBS also raised around 500 million pounds last week, but in this case incurred a modestly negative result. The bank's sale of part of its shareholding in FTSE 250 insurance group Direct Line was at 201 pence a share compared with a carrying value of 216 pence on the year-end balance sheet.
RBS's sale of Direct Line was mandated by the European Commission, and both RBS and Lloyds face further forced disposals under obligations to Europe.
Lloyds has been in talks with the Co-operative Group since last July about the sale of 632 branches. Meanwhile, there is currently no definite interest in the 316 branches RBS is obliged to relinquish, and there looks little prospect of RBS avoiding a loss on disposal.
While RBS appears to be more vulnerable to asset writedowns than its rivals, how future asset sales will actually play out is anybody's guess.
The banks have made provisions of billions of pounds for a litany of past vices, including the mis-selling of payment protection insurance and interest rate hedging products. Again, it's anybody's guess how those issues will pan out.
Put the uncertainty of the adequacy of provisions together with un-provisioned contingent liabilities and ongoing business restructuring, and it's nigh on impossible to predict future statutory bottom-line profits, even a year ahead.
How long it will take statutory earnings to come into line with underlying earnings -- and where underlying earnings will be in each bank's case when they do -- can only be speculation.
There is at least some clarity on dividends. Lloyds and RBS aren't currently paying them, for a start! They'd like to, and probably will, within the next year or two -- but these look sure to be token dividends initially, giving a negligible income.
Barclays is at least delivering dividends now, at a forward yield of 2.3%. Furthermore, the bank has given concrete guidance on its plans: "From 2014, accelerate our progressive dividend policy, targeting a payout ratio of 30% over time" -- which compares with a ratio of less than 20% for the most recent dividend.
As you can see, trying to value the banks is a murky business. Going by the simple fundamental value numbers at the start of this article appears to me to be at least as likely to prove successful as trying to find light in the darker depths of the accounts.
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