Are Lloyds Bank and Barclays worth double their current market value?
They just might be according to the latest piece of analysis by Boston Consulting, which has calculated that global banks could boost their combined market value by US$7 trillion over five years.
“Lenders could roughly double their current valuations if they pursue growth and improved price-to-book ratios despite obstacles,” said the US-based giant in a new report.
It calculates about 75% of bank stocks had price-to-book ratios below one in 2022 (ie below the value of their stated assets) while price-to-earnings multiples are almost half of 2008 levels.
The snag is that (other than hiring a consultant) making things better will not be an easy task.
"The largest driver of pessimism about the banking sector has been the significant drop in profitability," BCG said.
Even with the improvements, it suggests bank profits will remain under pressure from higher capital requirements and increased competition from newer players such as fintechs, BCG added.
"Banks are not likely to return to the profitability levels and valuations that existed before the global financial crisis."
Boston’s comments, however, highlight a growing gap between bulls and bears in the sector in recent weeks now that interest rates have stopped rising and even might soon start to fall.
Liberum recently argued that much of the banking sector’s recent outperformance is set to reverse in 2024 as the rate cycle rolls over, loan books contract and weak economic growth test underwriting standards.
“The structural bear case for incumbent banks remains intact: the debt supercycle endgame, the return of lower-for-longer, unfriendly regulation and political interference, fintechs exploiting the break-up of the banking value chain, and the material tech debt."
"Rising interest rates through 2022 and 2023 provided a tailwind to bank earnings (via higher net interest margins) and share prices. As we roll into 2024 and the rate cycle appears to be at or near its peak, we believe the structural bear case will reassert itself.
Not all are as gloomy. Morgan Stanley (NYSE:MS) recently suggested Lloyds in particular might still be able to spring some pleasant surprises, especially if housing recovers and margins hold up.
“On 0.9x [tangible net asset value] for a 13% [return on tangible equity] 2024-2026E, we re-iterate our ‘overweight’ on the stock,” the bank said, adding Lloyds is its top pick.
Barclays, too, is rated as overweight.