Ten years on from the financial crisis, investors in bank stocks are finally finding reasons to be cheerful. Full-year results from HSBC (HSBA), Lloyds Banking Group (LLOY), Royal Bank of Scotland (RBS) and Barclays (BARC) have brought welcome news of higher dividends and profits, despite the looming threat of Brexit. Bank share prices have in turn reacted positively to the results.
Royal Bank of Scotland was the first of the high street names out of the blocks, reporting a surge in full-year profit.
The bank agreed to pay a special dividend to shareholders, taking the total payout to 13p per share. RBS announced in August last year that it would resume payouts to shareholders for the first time since the financial crisis, when the bank was bailed out by the UK Government.
The company’s share price, which has been on an upward trajectory this year, has risen more than 10p since the results to just under 260p.
Lloyds is Morningstar analysts’ preferred stock of the two FTSE 100 banks, and is rated as four stars, which means it is trading below its fair value. Like RBS, Lloyds reported a strong rise in annual profits. The ordinary dividend was hiked by 5% to just above 3p, and that was accompanied by an announcement about a £1.75 billion share buyback.
Lloyds already yields above 5%. Payment protection insurance (PPI) claims have dogged Lloyds for many years – charges for 2018 were more than half that of 2017, at £750 million. Morningstar analysts described the results as “solid” and maintained a fair value estimate of 76p, above the current price of around 60p.
Barclays Targeted by Activist Investor
While many European banks have been retreating from the US, such as Deutsche Bank, Barclays remains a presence on Wall Street. Its investment banking arm, formerly Barclays Capital, was the outstanding performer last year.
But there are external issues overhanging Barclays that could distract investors from the news of a hike in the dividend from 3p in 2017 to 6.5p in 2018: activist investor Ed Bramson believes that more could be returned to shareholders and that to do so the investment banking arm should be reined in.
The board is expected to meet with Bramson in March. There is also a legal case ongoing relating to the bank’s fundraising during the financial crisis, when Barclays avoided a state bailout, unlike RBS and Lloyds.
Profits were flat on the previous year as a result of over £2 billion of conduct and litigation charges. The Morningstar fair value estimate of 220p per share is above the current price of around 160p.
Morningstar analysts downgraded the fair value estimate of Europe’s largest bank, HSBC, from 880p to 790p, but this still leaves the stock undervalued relative to its current price of around 610p. “We continue to see HSBC as undervalued as we believe concerns over a deterioration in global trade are factored into current share price,” says Morningstar analyst Michael Wu.
Like its European and American rivals, the bank’s trading arm was hit by the fourth quarter’s market volatility. Unlike Lloyds, RBS and Barclays, HSBC did not raise its dividend for the full year and the payout has been 51 cents since 2015.
Total dividend payments will be $10.2 billion for 2018, the same as in 2017. Still the bank has the biggest yield of the big four banks, with one of the chunkiest payouts in the FTSE 100.
The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person’s sole basis for making an investment decision. Please contact your financial professional before making an investment decision.