The Great Debate UK
– George Hay is a Reuters Breakingviews columnist. The opinions expressed are his own –
The UK’s forced investments in the banking sector are in rude health. The 41 percent holding in Lloyds Banking Group and 70 percent stake in Royal Bank of Scotland are comfortably above where the government bought the equity. But that doesn’t mean whoever wins next week’s general election should charge into a sale.
True, the government would get a fair price. RBS expects to make a 15 percent return on equity by 2013, implying it would generate earnings per share of 6.7 pence if all the government’s “B shares” are converted, according to Morgan Stanley. Such earnings would justify a current valuation of 50.3 pence once capitalised and discounted. That compares with a market price of 58 pence and the government’s purchase price of 50 pence.
Lloyds, meanwhile, has just reaffirmed that it expects a profit in 2010. Analysts anticipate earnings per share of around 9 pence by 2012, implying a current valuation of 68 pence once capitalised and discounted back — against a market price of 70 pence and the government’s entry price of 63 pence.
Shares in Lloyds Banking Group are worth 150 pence apiece, according to the analysts from Royal Bank of Scotland, who think the shares offer "a compelling restructuring opportunity" around today's 95 pence.
Lloyds, say the brokers, is going to recover sufficiently to pay a nominal dividend next year, and something quite substantial in 2011, thanks to margin expansion, cost control and normalising bad debts.
The strongest U.S. banks have already shrugged off the TARP, with its tiresome restrictions on executive pay. In Britain, Lloyds Banking Group has toyed with a jumbo capital raising as a way off the hook of the British government's fiendishly complex asset protection scheme.
Britain's asset protection scheme, invented to protect the banking system, is morphing into a bureaucratic monster. It's time to kill it off. Though state support is still needed, there are simpler ways for the government to prop up its ailing lenders.
More than seven months after it was conceived, and five months after Royal Bank of Scotland and Lloyds Banking Group signed up to use it, details of the APS have still not been agreed. The sheer task of sifting through 585 billion pounds worth of loans to be insured by the government means any final agreement is months away.