UK Banks May Soon Be Looking for Additional Capital

An in-depth look at the UK financial institutions that are the most likely to dilute shareholders, and an overview of which banking shares present the best value right now for investors

Erin Davis 14 November, 2012 | 4:08PM
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The Bank of England recently warned that it anticipates little improvement in UK banks' limited ability to generate capital. Consequently, it suggested that banks should seek outside sources of capital, including equity, in order to meet increasing regulatory requirements.

We reviewed the capital cushions of Barclays (BARC)HSBC Holdings (HSBA)Lloyds Banking Group (LLOY)Royal Bank of Scotland (RBS), and Standard Chartered (STAN) across a number of capital measures. We find that Lloyds and Barclays are the least well-capitalised UK banks. We further find that their subpar near-term profitability means that neither bank is likely to meet our capital expectations by year-end 2013, although both could do so by 2015 in our base-case scenarios.

On the other hand, we find that HSBC, Standard Chartered, and RBS are all fairly well capitalised and unlikely to need outside equity capital to meet regulatory requirements. HSBC and Standard Chartered are trading near our fair value estimate and offer little upside to investors, but we think that shares of RBS, priced at a 25% discount to our fair value estimate and a 35% discount to tangible book value, may be attractive to long-term investors.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Barclays PLC198.86 GBX1.00Rating
Credit Suisse Group AG9.63 CHF0.42Rating
HSBC Holdings PLC434.80 GBX0.01Rating
Lloyds Banking Group PLC48.73 GBX0.84Rating
NatWest Group PLC230.30 GBX0.79Rating
Standard Chartered PLC488.90 GBX0.85Rating

About Author

Erin Davis  is a senior banking analyst for Morningstar.