Banks to buy ahead of referendum

All the commotion caused by the Scottish referendum has upset share prices in two of our biggest banks. That's because Royal Bank of Scotland and Lloyds Banking Group are two of Scotland's biggest companies. Both have seriously underperformed both the sector and wider market since late August. That, however, is a buying opportunity, reckons one seasoned analyst.

We reaffirm our call for those with a short-term (eight-day) investment horizon to overweight banks with actual or perceived exposure to Scotland: Lloyds (Buy), TSB (Hold) and RBS (Hold)," writes Ian Gordon at Investec Securities.

Mr Gordon, who spent 17 years at Lloyds TSB, published his note, primarily covering Lloyds, just as the Bank of Scotland-owner and RBS warned Scots they would shift their HQs down south in the event of a pro-nationalist "Yes" vote.

"In our view, the various bank statements offer a reminder that the operational impact of a 'Yes' vote should be contained," says Gordon. "Proportionately, TSB has the greatest share of existing business in Scotland (24.1% of its franchise residential mortgage book as at 31 March 2014), but this is of very limited concern to us. In any event, our call to overweight banks with actual or perceived exposure to Scotland is predicated on an expectation of a 'No' vote."

Recent half-year results from Lloyds were pretty decent, and the valuation modest.

As we said at the time, a multiple of 1.4 times tangible net asset value might not appear cheap when compared with other banks, but by historic standards it is - pre-credit crunch multiples were double that.

Lloyds also enjoys better visibility than peers, and generated an underlying 16% return on tangible equity for the first half. Investec reckons Lloyds shares, currently sitting at 74p, are worth more like 85p.

For further opinion on Lloyds, check out our interview with Louise Cooper, financial analyst, columnist and blogger at CooperCity.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.