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Lloyds v RBS: which share price to back after Q1 results?

After soft Q1 earnings results, can Lloyds [LLOY] and RBS’s [RBS] share prices bounce back in the second half of 2019?

UK banks delivered lacklustre Q1 results across the sector. Lloyds and RBS shares can blame Brexit for the continuing uncertainty in the economy, which is hurting business. 

Any momentum that was left in both share prices is now in danger of flagging as we enter the second half of the year. But despite the soft results, analysts are optimistic that the pair will deliver returns before the year is out.

 

How do Lloyds and RBS share prices compare?

Since the start of the year, Lloyds share price is up 19.39%, while RBS has gained a more modest 7.53%. But both have experienced a sell-off since their respective Q1 earnings results missed expectations. 

To gauge which stock trumps the other, there are some important metrics to consider.

 

 LloydsRBS
P/E ratio (TTM)10.9734.58
EPS (TTM)5.5012.5
ROE (TTM)3.953.24
Net Profit (YoY)4.3%-11.3%

Source: Yahoo! Finance, Reuters (ROE) 21 May 2019, CNBC (OP)

 

Overall Lloyds P/E ratio of 10.97 makes it the cheaper stock of the two. But RBS's earnings per share of 12.5p dwarfs Lloyds 5.5p. For the full year, RBS expects total earnings per share to come in at 17p.

Lloyds return on equity shows it has been more efficient in turning shareholder money into profit. The bank is expecting between 14% and 15% RoE in 2019, compared to 12.5% seen in the most recent quarter. A big uptick from the current level. 

Lloyds focus on protecting its margins saw net profit come in at £1.2 billion, up from the £1.15 seen in Q1 last year. Interestingly, despite the pressures in the UK banking sector right now, Lloyds’ net interest margin held up better than most peers, down just two basis points quarter-on-quarter (2.91%). This makes it the only British bank to report a return on tangible equity above its cost of equity, with a 0.2% increase to 12.5%.

$1.2bn

Lloyds' net profit margin in Q1 2019

In contrast, RBS saw profits come in at £707 million, a downturn from the £792 million seen last year. RBS chief Ross McEwan blamed the slump on Brexit, competition for mortgage sales and the £62 million loss made by its ring-fenced Natwest Markets operation.

 

What investors should keep an eye on?

Q1 wasn't kind for UK banks. Across the sector, earnings results missed consensus estimates by a 4% average.

Brexit has hurt the housing markets with homebuyers put off buying new property for fear of a post-Brexit slump. Obviously, this impacts the banks who now find themselves in increased competition with each other. The less mortgages sold, the less money their credit businesses make. 

Low interest rates have also created an environment of cheap mortgages and loans. With the Bank of England not expected to raise interest rates until next year, banks are now finding margins squeezed.

At least Lloyds has been savvier than RBS. Having shunted customers onto lower interest rate savings accounts it has been able to maintain margins. Q1 saw a drop in deposits held in retail savings accounts and a 2% uptick in current account holdings. However, with two-fifths of its customers still with savings accounts, there’s plenty of opportunity for further savings.

2%

Q1 uptick in Lloyds' current account holdings

 

Where next for the share prices?

Lloyds’ expects to cut operating costs to £8 billion in 2019, a year ahead of schedule. This dramatic cost cutting has put them on a solid financial footing and ensured they have maintained profitability. RBS is on target to reduce costs by £300 million this year.

The relaxation of capital requirements have also burnished Lloyds’ image, in analysts’ eyes, as a solid and profitable bank.Lloyds 1-year share price performance, CMC Markets, 21 May 2019

 

In a sign of the bank's financial robustness, Lloyds common equity tier 1 ratio came in at 13.9% for the full year. A good result and considerably higher than RBS's 5.1%, just above the Bank of England’s 3.59% hurdle rate.

Yet RBS shareholders could be in for a payout. UBS banking expert James Napier believes that RBS can return £6 billion in capital to investors this year if it buys 5% of the bank back from the Treasury. 

Despite the underwhelming Q1 results, Napier has maintained his "Buy" rating for both stocks. His price target for RBS is 290p a share, which would represent a 26% upside on the current share price. Yahoo! Finance has the market consensus even higher at 301.06p. For Lloyds, Napier has pinned a 75p target price to the stock, a 23% upside and on par with other analysts.

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