Why own RBS (LSE: RBS) (NYSE: RBS.US) when you can own Barclays (LSE: BARC) (NYSE: BCS.US)? That was a rhetorical question posed by broker Investec last week.
Investec had just upped its rating for RBS to ‘hold’ from ‘sell’ to reflect the slump in RBS’s shares since February. From trading on a multiple of 1.0 times tangible net asset value (TNAV) they are now on a multiple of 0.8. But the broker asked sourly “Why own RBS when profitable, defensive, dividend-rich Barclays trades on 0.8 times too?”
It certainly seems to be a valuation anomaly. Both banks have seen their shares battered this year, RBS down 10% and Barclays down 14%. Both banks have their fair shares of problems and have suffered from a slew of bad news. Both banks are on the second iteration of their transformation programmes. But most observers would perceive a lower downside risk and nearer upside in Barclays.
Self-inflicted injury
RBS’s latest injuries are self-inflicted — or, rather, inflicted by a new CEO more amenable to do the majority-shareholder’s bidding. It made an additional £5bn write-off last year solely to accelerate disposal of problem assets by creating an internal ‘bad bank’. It’s taking an even bigger axe to its investment bank, and restructuring yet again.
It plans to accelerate disposal of US subsidiary Citizen’s Bank. RBS has had talks with giant Japanese bank Sumitomo about a possible sale, instead of the mooted flotation. If RBS is lucky this could create a bidding war, and swift action to dispose of Citizens will boost RBS’s capital.
But the target date for reaching a steady-state has been put back to 2018-2020, by which time the UK economy and housing market might not be so favourable for a Lloyds Bank-lookalike strategy. Meanwhile, the prospect of a dividend is remote.
Heat not light
The reaction to Barclays’ recent results generated more heat than light. Barclays has a costs problem, and it has an image problem, but the two get confused. The investment bank suffered from poor market conditions in its core ‘FICC’ business, which is a transient issue. There’s a more structural issue in the changes to the capital and regulatory regime that makes these activities inherently less profitable: so Barclays has to sort out its cost-base.
But the tricky problem is whether it’s possible in the current climate to house a US-centric investment bank within a UK retail and commercial bank. That issue will grow if a Labour government looks likely next year.
Flattering
Despite disappointing results, Barclays is, as Investec describes, fundamentally profitable. It’s maybe flattering of the broker to call it defensive, but the downside is limited compared to RBS. As for dividend-rich? Well, a prospective yield of 4% is above the FTSE 100 average but it’s not the highest-yielding bank in the FTSE nor, arguably, the safest.