RBS and Lloyds Miss Rally as Scots Independence Vote Weighs

Sep 04, 2014 6:44 am ET

(Updates with analyst, and hedge fund comments from seventh paragraph.)

Sept. 4 (Bloomberg) -- Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, the U.K. banks that lend the most in Scotland, are missing out on a rally in European financial shares after a poll this week showed support for Scottish independence is increasing.

Since the poll on Sept. 1, RBS has fallen 2.7 percent to 350.7 pence a share and Lloyds declined 1.8 percent to 74.51 pence as of 11:03 a.m. in London. That compares with gains of 1.5 percent for London-headquartered Barclays Plc and 1.1 percent for HSBC Holdings Plc, which yesterday posted their biggest daily increases since July 30 and Aug. 14 respectively.

The prospect of Scotland breaking away from the U.K. is weighing on the two stocks after the poll showed nationalist leader Alex Salmond’s pro-independence Yes campaign is closing on the No camp. Analysts at Credit Suisse Group AG estimate Lloyds has 26 billion pounds ($43 billion) of consumer and commercial lending to the country and RBS at least 14 billion pounds. Barclays and HSBC’s operations in Scotland are limited, the analysts led by Carla Antunes-Silva said yesterday.

“Clearly the market has started to apply discounts to the banks with the most Scottish connections as they’re factoring in a greater degree of uncertainty,” Ian Gordon, an analyst at Investec Ltd. in London, said in a telephone interview.

‘Parlous State’

Yesterday, the 45-member Bloomberg Europe Banks and Financial Services index posted its biggest intraday jump in six weeks, extending its rise to 2.1 percent this year, as Russia and Ukraine agreed on the steps needed for a truce. The index traded down 0.2 percent today. The U.K.’s FTSE 100 Index this week touched its highest level since December 2009 after it received an additional boost from a report that showed British services growth unexpectedly accelerated last month.

HSBC Chairman Douglas Flint has said a vote on Sept. 18 for independence may lead to capital flight from Scotland and could leave the financial system in a “parlous state.” The pound dropped to the weakest versus the dollar since February after the Sept. 1 poll by YouGov Plc showed the lead for the No campaign is now down to six percentage points.

Scottish independence is “no longer unimaginable,” Natixis SA analyst Rene Defossez said in a note today, advising customers to bet against U.K. bonds and the pound before the referendum as uncertainty mounts.


Goldman Sachs Group Inc. said the threat of a breakup may lead investors to sell Scottish assets and households to withdraw deposits from banks based in the country. Hedge-fund firm East Lodge Capital Partners LLP has taken a short position in RBS, betting the stock will decline further if Scotland exits the 307-year-old union, according to a person with knowledge of the matter. Karyn Geringer, a spokeswoman for East Lodge in New York, declined to comment.

Investors have also been selling TSB Banking Group Plc because Scottish mortgages account for 24 percent of its total book, Credit Suisse said. TSB shares have fallen 3.8 percent from its closing price last week to trade at 279 pence, with the volume of shares traded surging to 2.5 million yesterday, more than four times the average for the previous 30 days.

--With assistance from Richard Partington and Alastair Marsh in London.