For a couple of years after the banking crisis, I just couldn’t understand why shares in Royal Bank of Scotland (LSE: RBS) were valued so highly. The bank was on a similar rating to Lloyds Banking Group, yet was at least a year behind in getting itself back into good enough shape to resume paying dividends.
Then in the 12 months to 7 April, we saw the share price slide by 41% — but does a 17% recovery since then, to 247p for an overall 12-month loss of 31%, really signal the passing of the bottom? We should perhaps not be too confident just yet, as forecasters suggest the bank will still be struggling for earnings this year, and if it gets a return to dividends approved then we’ll still only see a yield of around 0.2%.
We could have a shaky 12 months ahead, but a 26% EPS rise forecast for 2017 would see the P/E drop to 10.8, and a dividend of around 2.7% is looking increasingly likely. That would still be some way behind the 7.7% expected from Lloyds that year (from shares on a P/E of only 8.7), but the worst of the worst is surely over for RBS now — isn’t it?
Willpower
Investors have been willing Tesco (LSE: TSCO) back to success for some time, and it will surely eventually happen — even with increasing competition from the cut-price upstarts, Tesco still commands around a third of the UK’s groceries market.
The share price is down 23% over a year and 54% over five years, to 182p, though a bright start to 2016 made it look like the recovery was finally here. But since a peak in late March, the shares have slipped back by 10% again. We could easily be seeing a repeat of a familiar pattern over the past couple of years — an optimistic rise for a month or two, followed by a resumption of the downward trend.
The thing is, Tesco’s fundamentals still don’t look great to me. Though the company did record a modest profit for the year ended February 2016 and had, according to chief executive Dave Lewis, “regained competitiveness in the UK with significantly better service, a simpler range, record levels of availability and lower and more stable prices“, price competition remains fierce with Lidl and Aldi both on pretty aggressive store roll-out plans.
On a forward P/E of 23.8 for this year, dropping to 17.7 on what I see as over-optimistic forecasts for next year, Tesco shares still look too expensive to me.
Asian fears
And then we come to Standard Chartered (LSE: STAN), whose board stubbornly hung on for too long in the face of investor adversity until they finally saw sense. And though the shares are down 46% over 12 months and down 65% over five years, there’s been a bit of an uptick after the bank’s management started to get serious about its predicament. Since a low on 11 February, we’ve seen a 40% recovery to today’s 559p levels.
Since new boss Bill Winters took over, Standard Chartered has worked to derisk its balance sheet by disposing of riskier assets and working to rebuild its capital position. And improving sentiment towards China, where monetary easing looks on the cards, means Standard Chartered feels a fair bit less dangerous an investment than it did a year ago.
But even with a 116% rise in EPS forecast for 2017, the P/E would still only drop to 13.6. Standard Chartered’s long-term recovery has undoubtedly started, but there are banks out there whose shares are far better value right now.