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As in previous years, it pays to divide these four giants into two. Lloyds and RBS are the state-backed elements, although the former is in the happy position of seeing the government’s stake being slowly wound down. Lloyds still retains its dominant presence in the UK mortgage market, and while there are ongoing concerns about the strength of UK house prices, the much-heralded fall in this market is yet to arrive. With UK inflation picking up, talk is in the air of when the UK may see a rate hike, which would in the long-run boost profit margins in the lending division.
RBS remains stuck in a painful place as it continues to cut costs across the board, which cannot go on forever. A third of jobs at the once-mighty leviathan have gone, and eventually the firm will run out of areas to cut. Throw in a need to raise a further £2 billion to meet additional capital requirements, and the ongoing problem of who will buy its Williams & Glyn unit, and it is clear that RBS has a long road ahead of it.
On to the healthier side of things, we turn to Barclays. President Trump’s pledge to loosen banking regulations points to a brighter future for the big investment banks, and Barclays’ presence in the US market means it could be poised to benefit. Although it trades at 13.5 times earnings, a price-to-book ratio of 0.6 points towards a compelling valuation.
By comparison, HSBC is at 0.9 times book value, so there is less of a bargain to have here. Nonetheless, its mid-market business is only really rivalled by US giant Citigroup, and its economies of scale give it a competitive moat compared to others. HSBC’s emerging market business is often a cause of concern, but fears are easing around growth in these key areas, which helps to explain the spike in its shares to levels not seen since late 2013.
Parts of British banking are in good health, others still need much work. Upcoming earnings should help to sort the wheat from the chaff.