UK bank valuation

There have been a number of developments since my last purchase of bank shares. Are they still worth holding?

Lloyds Banking Group

Currently trading at 43.7p. 16.3bn shares in issue prior to the most recent government intervention. The most recent government intervention comprises:

• £4bn of preference shares converted to ordinaries at 38.43p, so an extra 10.4bn shares.
• £15.6bn of B shares at 42p which will eventually convert to ordinaries at 115p, so an extra 13.6bn ordinary shares.

So Lloyds will have just over 40bn shares outstanding after full conversion.

The £4bn of preference shares will accrue to the ordinary shareholder, but the £15.6bn will simply be paid back to the government over the next 7 years.

Lloyds reported £29bn of tangible asset value (pro forma) in their results. Core tier 1 was reported as £32bn, but includes some minority interests. Adding in £4bn from the preference share conversion, we should expect £33bn of tangible assets for 40bn shares, which is 82p per share

Prior to the latest government intervention fair value would have been 217p. So this has been hugely destructive to shareholder value.

Barclays

Currently trading at 61.6p. 8.4bn shares in issue. No change to capital position since annual results, which reported £26bn of tangible assets. That's 310p per share.

What if Barclays participated in the Asset Protection Scheme but couldn't pay the fee in cash? £10bn at 50p per share means 20bn new shares and a value per new share of 91p.

HSBC

Currently trading at 349.25p. 12bn shares in issue, rising to 17bn after their rights issue. They have £47bn of tangible equity, rising to £60bn after the rights issue. That's 353p per share. The rights attached to the share have some value, but I forget how to do the calculations....

Let's assume HSBC don't need to participate in the Asset Protection Scheme.

RBS

Currently trading at 18.95p. 39.5bn shares in issue, rising to 55.2bn after the government's preference shares convert, rising again to 85.2bn after the conversion of the government's B shares.

Tangible assets attributable to ordinary shareholders were £19bn, rising to £24bn after the conversion of preference shares, rising again to £37bn after the government's purchase of B shares. That's 43p per share.

Prior to the announcement of the latest government scheme, RBS had 39.5bn shares and £19bn in tangible assets, or 48p per share. So the dilution cost of this scheme is minimal

Conclusion

Barclays is trading at about 20% of tangible asset value, RBS at about 45%, Lloyds at about 55%, HSBC at about 100%.

Barclays participating in the Asset Protection Scheme is the big unknown, and marking them down on that basis seems reasonable.

I plan to keep holding my bank shares. Surely there can't be much more dilution to come (except for Barclays), and in the long run a recovery to 120% of tangible assets should be achievable.