Choose cautious RBS over risky Lloyds, Berenberg says

UK banks are out of favour with investors but it is possible to differentiate between the riskiest, Lloyds Banking Group and Royal Bank of Scotland, whose cautious strategy is paying off, Berenberg analysts said on Monday.

Because of doubts about Brexit, politics and the economy, sentiment towards UK banks has rarely been lower, Berenberg’s Peter Richardson said. British banks trade at a discount to their European peers and there is little investor interest.

Banking trends such as revenue growth and loan losses appear stable but they are fragile, especially for consumer credit, Berenberg said.

Consumer default rates have risen for the past five quarters, consumer credit is too cheap and borrowers may struggle to repay as interest rates rise.

Outright failures of Bank of England stress tests are unlikely but Lloyds is under the most pressure whereas RBS will pass the test without management action, Richardson said. RBS has 40p per share of excess capital and trades on a lower multiple than Lloyds and Barclays, while capital return hopes for Lloyds are too high.

"While broad-based respite from the current negative sentiment is unlikely given ever-present political and economic risks, greater differentiation between UK banks is possible," Richardson wrote. "Avoiding cyclically-exposed banks, in particular Lloyds, is essential."

Berenberg maintained its ‘sell’ rating on Lloyds and 'buy’ ratings on RBS and Standard Chartered, whose success in growing low-risk client revenues is overlooked. Richardson kept ‘hold’ ratings on HSBC and Barclays. Price targets were also unchanged at 60p for Lloyds and 340p for RBS.