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Stock Strategist Industry Reports

Bank of England's Dreary View May Send U.K. Banks Looking for Additional Capital

We explore which financial institutions are the most likely to dilute shareholders.

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The Bank of England recently warned that it anticipates little improvement in U.K. banks' limited ability to generate capital. Consequently, it suggested that banks should seek outside sources of capital, including equity, in order to meet increasing regulatory requirements. We reviewed the capital cushions of  Barclays (BCS) (BARC),  HSBC (HBC) (HSBA),  Lloyds Banking Group (LYG) (LLOY),  Royal Bank of Scotland (RBS) (RBS), and  Standard Chartered (STAN) across a number of capital measures. We find that Lloyds and Barclays are the least well-capitalized U.K. banks. We further find that their subpar near-term profitability means that neither bank is likely to meet our capital expectations by year-end 2013, although both could do so by 2015 in our base-case scenarios. On the other hand, we find that HSBC, Standard Chartered, and RBS are all fairly well capitalized and unlikely to need outside equity capital to meet regulatory requirements. HSBC and Standard Chartered are trading near our fair value estimate and offer little upside to investors, but we think that shares of RBS, priced at a 25% discount to our fair value estimate and a 35% discount to tangible book value, may be attractive to long-term investors.

Bank of England Urges U.K. Banks to Raise Additional Capital
The minutes of the Bank of England's Interim Financial Policy Committee meeting in mid-September revealed that the committee thinks U.K. banks' limited ability to generate capital means that they should seek outside capital (for example, sell mandatory convertible bonds or new shares through rights offerings).

Erin Davis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.