Time to confess an unpopular opinion. I do actually believe that some of the large banks are cheap. Obviously that does not include bad boy Metro Bank (MTRO), which is now neither large nor credible as discussed in a bunch of articles by me. No, I was rather thinking about Lloyds (LLOY), whose shares slipped below tangible book value following PPI claim-influenced results, or Barclays (BARC), which has also just reported…
I know what you are thinking...what is 'tangible book value'? As with many numbers it is an opinion but at least quantitatively it has its roots in something meaningful in the history of investment analysis that sages such as Buffett's mentor Benjamin Graham or the great Sir John Templeton would understand and appreciate. Naturally book value per se is not some kind of panacea – you need a viable business alongside it, not a structurally challenged one. The business of banking is progressively becoming more boring. This is not just because of regulatory efforts to crack down on the (as Tom puts it) 'coke and hookers' brigade that can still be found somewhere in every investment bank, but across classic retail banking. Comedy banks such as Metro have had to learn fast that internal controls are a real regulatory focus. Naturally such a focus does not stop bad lending or potentially another crisis...it just means somebody, somewhere, would have run a scenario spreadsheet on it. Anyhow, I nearly fell asleep reading the Lloyds results because they were so annuity-like, although actually below the surface the cost base is being transformed as technology solutions are applied.
We can all perceive scenarios where mortgages come under pressure or credit card balances (an area Lloyds has extended further into recently) could hurt but at least Lloyds is relatively well-managed/administered and has a big client base and distribution capabilities. This is a barrier which xyz new fangled digital bank will find hard to break into. Meanwhile, with Lloyds chucking out a 6% dividend yield (which is not hurting the sensible underlying capital position) plus a near 12% return on tangible equity suggests to me book value is a bit rude, so long as you are not expecting fire and Brexit brimstone in the UK economy (much of which of course is already anticipated given the omnipresent newsflow).
As for Barclays, I have loved it up before and sensible numbers with some great comments about beating cost cutting targets worked for me, even if the revenue environment is 'challenging'. As with Lloyds, Barclays trades below its tangible book value (275p), but in the latter's case the discount is much higher at around 40%. Now Barclays is a more aggressive and diversified bank with a thick slug of investment banking and so part of this is undoubtedly justified, but the geek maths (9% target return on tangible equity this year, 10% next year) continue to suggest to me (as I previously rambled on about here) that this 'still means the share should be trading nicely above 200p'. I still hold that view...and the stock with its 4% odd yield (note the interim dividend was nudged up too).
As for talking effluent (no doubt some will think in the above paragraphs I have already done this)...I am a man of my word and as discussed here back in February, I did double my position in the colostomy technology and other fascinating medical products company ConvaTec (CTEC). Reiterated numbers show the ship is steadying, following angst, management change and the like. As with Barclays, a fairer value looks north of 200p – especially if cash conversion can push up to 100% in the next set of numbers helping to continue to push debt down.
Filed under: Barclays, Lloyds, ConvaTec, Rob Terry, Goals Soccer Centres, AIM Awards, Volex, Kier
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