Bank of England's Dreary View May Send U.K. Banks Looking for Additional Capital
We explore which financial institutions are the most likely to dilute shareholders.
The Bank of England recently warned that it anticipates little improvement in U.K. 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 (BCS) (BARC), HSBC (HBC) (HSBA), Lloyds Banking Group (LYG) (LLOY), Royal Bank of Scotland (RBS) (RBS), and Standard Chartered (STAN) across a number of capital measures. We find that Lloyds and Barclays are the least well-capitalized U.K. 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 capitalized 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.
Bank of England Urges U.K. Banks to Raise Additional Capital
The minutes of the Bank of England's Interim Financial Policy Committee meeting in mid-September revealed that the committee thinks U.K. banks' limited ability to generate capital means that they should seek outside capital (for example, sell mandatory convertible bonds or new shares through rights offerings).
Erin Davis does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.