UK Banking ADRs

 Although the  focus for MSV is to look at emerging & frontier markets, American Depositary Receipts are also one of the major topics we will look to provide extensive coverage on.

With the financial meltdown & associated global uncertainty in financial markets is coupled with the recent frenzy of fund raising & acquisition, banking seems to be forming a frontier market all of its own. I thought a little focus on the UK banking sector & particularly a couple of the ADR traded stocks would be a pleasant diversion.  

 

 

 Barclays – (NYSE / BCS)

 

Barclays has built itself into a globally diversified group with an ambitious Anglo-American management team. Barclays can also consider itself extremely lucky that RBS won the battle for ABN Amro. Instead of paying £11 billion for third tier ABN Amro, Barclays has managed to buy the US operations of top tier Lehman’s for £1 billion. In time, this deal could prove one of the deals of the century. City analysts believe Barclays are still not valuing their investments at fair value. Barclays claim its all academic as they don’t intend to sell any of their investments anyway. The debate rages on.

Long term Barclays should be a winner but short term, it needs to boost its capital cushion. At present, management are seeking to issue preference shares to two Gulf investors, rather than lean on the UK government. Is this pride or is it to protect their “commercial freedom”, more specifically the dividend and executive pay? The latest fund raising looks a poor deal for exisiting shareholders, but money is scarce.

 

LLOYDS-TSB - (NYSE / LYG)

 

Lloyds has long been a favourite among income investors, traditionally offering the biggest dividend yield of the UK banks. In fact Lloyds had become so directionless in terms of strategy that many believed the end game was to be taken over by a big US bank. The credit crunch has been a blessing in disguise for Lloyds. The bland has become the beautiful. Although Lloyds managed to avoid most of the trouble spots, it is still fairly dependent on the mature UK economy. While the opportunistic merger (of unequals) with HBOS goes ahead, it will still leave the combined entity quite UK focused.

Although Lloyds track record on acquisitions is poor, the price is right with HBOS. It has been estimated that Lloyds will pick up £21 billion of book value for around half price. Not only that, the cost savings will be huge, given the overlap in UK retail banking. That leaves a lot of headroom should things get worse. With the UK government on board, competition regulators have been brushed aside and Lloyds is being offered concessions on their dividend and early repayment of government funds.

 

 

HSBC – (NYSE / HBC)  

 

Although its sub-prime operations dominated the headlines in 2007, HSBC has emerged as a safe haven among global banks. Not only is it well diversified and has a strong capital base, importantly it has a low reliance on wholesale credit markets. In the UK, it actually has morein deposits than loans. That’s unheard of in this age of credit addiction. Having the highest credit rating of the UK banks gives HSBC a significant cost advantage over its rivals. It is also enabling HSBC to grab market share across many segments as rivals are unable or unwilling to lend to their customers. 

The  US consumer finance unit (Household International) is not out of trouble yet, but HSBC can absorb its losses and avoid offloading assets at distressed prices. HSBC quickly refused any help from the UK government and was able to boost the capital in its UK operations with internal funding. Management believe the credit crunch will not be over until 2010/11, and so are holding off making any big acquisitions. Perhaps its cheaper to acquire customers rather than companies. 

 

 

I am currently following all three of these in my Fantasy Stock Exchange portfolio on Facebook, which has been making my afternoon coffee breaks certainly interesting. For the more adventurous amongst you, you make want to have a look at RBS (NYSE / RBS), if banking was a thrill ride, RBS would be top of the list for queues ….