Bank ordinary vs preference

Ordinaries
The recent run up in bank share prices has left me with something of a dilemma. Back in January it seemed obvious that they were good value, but since then they have rather outperformed:

• Barclays up 220% at 279p
• RBS not far behind: up 214% at 44p
• Lloyds up a mere 61% at 109.6p
• HSBC have had a rights issue, and adjusting for that and their dividend are up a paltry 20% at 482p.

Barclays
I'll updated my Barclays numbers only slightly to take account of the sale of iShares. I make net tangible asset value 333p. Current discount: 16%.

RBS
I'm adjusting RBS's value per share to 47p to take account of their bond swap. Current discount: 6%.

Lloyds
I've realised that my Lloyds valuation in February was thoroughly misleading. In February I rated the shares as having 82p of tangible asset value. But that was after the conversion of preference shares (which at the time was at a price only slightly below the prevailing share price).

We have 13.6bn new ordinary shares after conversion of govt B shares, 10.3bn from conversion of preference shares, and the 16.4bn shares outstanding right now. At the end of the day the tangible net assets are about £35bn (previously assessed at £33bn, but I'm adding in a bit extra for their recent bond conversion) so 87p per share.

Buying one share now and paying 26p to take up your share of the open offer will get you 1.63 shares post-offer. So the value of one share now (in terms of tangible assets) is 116p.

So currently Lloyds are trading at a discount of 6% to tangible net assets.

HSBC
HSBC hasn't changed since my calculation in February: value 353p per share. Current premium: 37%.

Ordinaries conclusion
Assuming a reasonable, conservative valuation is 1.2x book value, Barclays could still rise 44% from here, RBS and Lloyds a further 28%. HSBC is already trading at a premium to this valuation measure. Assuming a RoE of ~12% (pretty conservative), at a premium to book of 1.2, the banks would be on an earnings yield of 10%.

Preference shares
Lloyds have preference shares with a gross yield of 9.75%, currently trading at 68p. A return to par would see these rise 47%.

RBS (via NatWest) have 9% preference shares trading at 66p, so a similar situation.

These would appear to be marginally better value than the ordinary shares. They share the downside of complete wipeout, have an additional risk of banks opting not to pay dividends (they are non-cumulative), but do not have the same dilution risk.