Here's why the Lloyds Bank strategic trade idea was a winner
Lloyds can move higher as its net profits are leveraged to the sterling money market yield curve.
Dubai - Lender's valuation still compelling at nine times earnings
By Matein Khalid Global Investing
Published: Sun 28 Jan 2018, 6:16 PM
Last updated: Sun 28 Jan 2018, 8:18 PM
I had recommended buying the shares of Britain's Lloyds Bank in a column published on October 29, 2017. My UK banking black horse has been a real winner in the last three months. Lloyds' New York ADR has risen from 3.50 to 4.16 as I write. I believe Lloyds can move higher as its net profits are leveraged to the sterling money market yield curve and more Mark Carney base rate hikes. In any case, Lloyds will generate excess capital even though its Basel Tier One ratio is a stellar 14.8 per cent. This means a higher dividend and share buybacks in 2018, a mantra I adore as I am long the bank's shares. Lloyds boasts a return on tangible equity of 16 per cent even as lending/mortgage margins rise. As equity dilution risk falls due to excess capital generation, profitability rises and valuations are rerated.
The valuation of Lloyds Bank is still compelling at nine times earnings, 0.97 times book value and 6.1 per cent dividend yield. The acquisition of MBMNA's UK credit and portfolio and Scottish Widow's pension/annuity business are both growth ballasts that I believe are sustainable. Lloyds can and will outperform RBS and Barclays as its smartphone/digital banking technology backbone gooses margins and reduces cost. Even now, Lloyds boasts a 21 per cent market share in retail banking and is the UK's top mortgage lender. I reiterate my conviction that Lloyds shares can hit 85 pence on the London Stock Exchange.
Sterling's strength has been the reason I prefer to buy Lloyd's New York ADR. I have published successive long sterling columns since the cable breakout at 1.28 late last summer. As we scale June 23, 2016 levels, sterling will trade on UK data commentator, Westminster politics/the Tory regicide index and Brexit deal making.
Barclays shares have been a disaster in the City of London, mired in the 180-200 pence range since November. Despite New York hedge fund Tiger Global's $1 billion accumulation, the grandees of the Square Mile are sceptical about CEO Jes Staley's plan to focus on the US investment bank, Barclaycard/UK retail banking while exiting Africa, continental Europe and the Middle East. Barclays trades at a mere 0.5 times tangible price/book, a huge discount to JPMorgan 2.1 times or even Morgan Stanley's 1.6 times relative valuation.
True, there is no way I can remotely compare the franchise value, earnings power or global brand of the House of Morgan twins with the humbled Quaker High Street clearing bank transformed into Bob Diamond's Libor rigging Barcap, once Britain's only real global investment bank since the death of Sir Sigmund Warburg. Yet Barclay's Cinderella valuation now seems compelling to me, at last relative to Wall Street names like Morgan Stanley, Citicorp and Goldman Sachs that have rerated to my target prices. Staley's restructuring has boosted Barclay's Basel Three capital ratios and the acquisition of Lehman's equity franchise a decade ago will finally allow it to print money on Wall Street.
A steeper US Treasury debt yield curve, global M&A mania and Trump's rollback of Dodd Frank/tax reform are all bullish for Barclays. We few, we happy few, we band of bankers, Jes Staley might have roared at the battle of Agincourt but the true mettle of his pasture will be if he restores the dividend.
Nothing so depresses the cognoscenti of the City as a dividend cut, the draconian decision Barclays made two years ago. Fixed income/currencies trading is also in a malaise at Barclays, as in its New York money centre banking peers and Staley is still under investigation for his ill-judged attempt to "out" a whistleblower. I know Tiger Global for Chase Coleman's macro/E-commerce bets, for his genius in judging the world changing potential of Spotify, Airbnb and Priceline.com. This guy is the real McCoy, my Pied Piper for Barclays.
2017 was such a tragic year for Britain. I was in London during the Arianna Grande horror, the Grenfell Towers fire and the London Bridge terrorist attack and saw the Westminster palace attack on Sky TV. So hope 2018 is a wonderful, wonderful year for HM The Queen and all British friends in town. Jolly boating weather, what? Lads!