Royal Bank of Scotland Group plc (RBS), Lloyds Banking Group PLC (LYG), Barclays PLC (BCS): Banks’ Capital: Now We Know the Worst

LLoyds

Announcing last year’s results, Lloyds boasted that it was ahead of its transformation plan. Costs had been reduced by 5% and it had sold 40 billion pounds of distressed assets against a plan of 25 billion pounds. That might give it less headroom to shed more assets, but then, Lloyds is probably better placed than RBS to launch a contingent bond issue. It has a similar convertible issue on its books already.

The third way of raising capital is to conserve cash. Doing that quickly means things like cutting bonuses and dividends — or in the case of RBS and Lloyds, delaying starting paying dividends. But given the political impetus behind privatization, both banks will do all they can to avoid that.

Recovery

Recovery in the banks’ shares requires past bad assets to be disposed of, the end of regulatory and legal costs such as PPI and LIBOR, and a positive economic environment.

The muted demands of the FPC are some encouragement that the first item is well on the way to being dealt with. Former shareholders’ legal action against RBS over its 2008 rights issue show that the second item is still alive and kicking, though I doubt that action has great prospects. Economic recovery looks distant, but it is bound to come.

So banks shares have a reasonable upside. But it could be a long haul, and the eurozone hangs over the sector as an ever-present threat.

Boring

If you invest in bank shares, it’s worth having some money in more boring stocks — ones that you can tuck away and forget about, that will pay good dividends and grow in value over the long term. The Motley Fool has picked five FTSE 100 stocks that should fit that description. You can read more about them in this brand-new report: “Five Shares to Retire On.”

The article Banks’ Capital: Now We Know the Worst originally appeared on Fool.com and is written by Tony Reading.

Tony does not own any shares mentioned in this article.

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