Lloyds has been through a phoenix-from-the-flames recovery in recent years, with its share price rocketing, although analysts warn that it is unlikely to see such strong growth continue.
Spurred on by this success, a number of fund managers have now started buying up shares in Lloyds’ “badly behaved cousin” RBS.
One such manager is Hugh Sergeant, who counts the bank as a top-10 holding in his R&M UK Equity Long Term Recovery and R&M UK Equity High Alpha funds.
However de Blonay, who runs the £531m Jupiter Financial Opportunities fund, warns retail investors that RBS’s future still looks precarious and they shouldn’t buy into it in the hope of it repeating Lloyds’ success.
“RBS’s investment bank makes it problematic. It is a part of the business that is underperforming plus there are potential litigation issues still on the horizon,” de Blonay explained.
With Lloyds having been bailed out after the chaos of the Lehman Brothers bankruptcy, the Government is now sitting on a decent profit after taking a 43 per cent stake in the bank.
Due to a steadily improving economy and a huge restructuring process within the business itself, Lloyds is starting to see the light at the end of the tunnel, having delivered better-than-expected earnings growth in its most recent results.
According to FE Analytics, investors who bought Lloyds two years ago would now be sitting on a return of 134 per cent.
Performance of stock vs index over 2yrs
Source: FE Analytics
The share price is now above £0.80 and the Government has already offloaded part of its stake.
Now there is even talk about the bank paying out a dividend this year for the first time since the crash.
Steve Davies (pictured) counts Lloyds as his largest holding in the Jupiter Undervalued Assets and Jupiter UK Growth funds.
He recently told FE Trustnet that he had a price target for the stock at above £1, and given the fact the bank has strengthened its balance sheet, disposed of its esoteric banking activities and now has a growing loan-book, Davies expects Lloyds to continue to perform well.“This back-to-basics approach is reflected in the bank's outlook,” Davies said.
“When we were setting out the case for investing in Lloyds three years ago, we estimated the bank might eventually be in a position to pay a dividend of 5 to 6 pence a share – a pay-out that would in our view support a share price in the region of £1 or more.”
Davies says he estimates a fair share price for Lloyds at 140p to 150p.
There has recently been renewed optimism in equity investment here in the UK, which has in part been down to the flotation of the Royal Mail and the part re-privatisation of Lloyds.
Given this growing demand, many retail investors are wondering if RBS can recover in a similar way. The Government took a staggering 81 per cent stake in RBS at the same time. Unfortunately, it hasn’t been able to bounce back to the extent that Lloyds has.
Issues surrounding a chief executive swap, an IT meltdown and the fact it posted an £8bn loss last year have all contributed to its poor performance.
Investors in RBS have lost money over one and three years and while shares in Lloyds are still down over 10 years, the graph below shows how RBS has done virtually nothing since its valuation troughed in January 2009.
Performance of stocks over 10yrs
Source: FE Analytics
Guy de Blonay says there are a number of reasons why RBS has struggled while Lloyds has prospered.
“The first thing is that Lloyds moved earlier and has been more committed to restructuring towards profitability from its revenue growth. It has also been more effective at implementing a clear strategy,” de Blonay explained.
“At RBS, it has been more complicated.”
“It has an investment bank arm which costs rather a large amount of capital for a rather weak return. Lloyds has, in a sense, had it a bit easier because it is more retail-focused and has been able to sell its non-core assets pretty quickly,” he added.
However, although de Blonay is more than happy to hold Lloyds in his funds, he isn’t thinking of buying back into RBS.
“We do have Lloyds, in fact we have held it for some time,” he said.
“That’s because we have a better understanding of its profitability and they have a more consistent management team that has a clearer target.”
The manager says there are three major issues surrounding RBS.
First, he is concerned about the future of its investment bank and how much it would cost if this arm of the business is run off.
The manager also says that even though the outlook for RBS is tricky, its shares are still not that cheap on a relative basis, especially compared with Lloyds.
However, the manager says he may re-establish a position in RBS at some stage in the future.
“If RBS were 30 per cent cheaper, then I would certainly have another look. However, I still prefer Lloyds because I don’t think RBS’s valuation is correct given the uncertainties it carries with it,” he added.
Like de Blonay, Graham Spooner, investment research analyst at The Share Centre, is still steering well clear of RBS for the time being.
“It is our least favoured UK bank. If an investor wanted exposure to the sector, I would not point them towards RBS,” Spooner said.
“Things have recovered a bit recently, but there still isn’t a great deal to get excited about. They are still shrinking the business, having to be dictated to by politicians and now they are setting up this internal good-bank/bad-bank split.”
“As I said, it is our least favoured UK bank,” he added.
