*BBC reports on meeting of government and Barclays, Lloyds TSB, RBS
Robert Peston, the BBC business editor, is reporting on his blog
(www.bbc.co.uk/blogs/thereporters/robertpeston) that the chiefs
of Barclays, Lloyds TSB and RBS met with Alastair Darling (Chancellor
of the Exchequer), Mervyn King (Bank of England Governor) and Adair
Turner (Financial Services Authority chairman) last evening. Peston
claims that "The three banks estimate that they may need around 15bn
of new capital each, with 7.5bn paid up front and a further 7.5bn
guaranteed by the Treasury that would be delivered if it became
necessary".
*25-29% EPS dilution, pro-forma core tier 1 of 7-9%
Assuming the government were to take straight equity stakes of 7.5bn
in each bank at a 30% discount to last night's closing price, the 2009
EPS dilution for Barclays, Lloyds TSB/HBOS combined and RBS would be
27%, 25% and 29% respectively, on our estimates. Pro-forma 1H08 core
tier 1 ratios for the three would rise to 9.0%, 7.1% and 7.1%
including the July rights issues and an additional 7.5bn of government
capital.
*Credit cycle loan losses to come
Whilst the shares would then be trading at 7x for Barclays and Lloyds
TSB/HBOS and 5x for RBS including this dilution, we see considerable
risks to earnings - whatever rate cuts and investment we see in the
short term - from rising loan losses. Substituting 1992-level loan
writeoffs in our 2009 UK banking forecasts and allowing for government
capital dilution would reduce 2009 EPS forecasts by 54% at Barclays,
76% at Lloyds TSB/HBOS and 91% at RBS, placing the shares on 11.4x,
22.9x and 41.9x trough earnings, respectively. We retain our
preference for Barclays over Lloyds TSB/HBOS and RBS given lower
credit risks and stronger balance sheet.
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