The Great Debate UK

UK should resist temptation to dump bank stakes

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– 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.

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