The last few years have been woeful for the banking sector. Just look at these nightmarish performance figures. Over three years, Barclays (LSE: BARC) is down 36%. HSBC Holdings (LSE: HSBA), once thought to be the “good bank”, is down 38%. And Royal Bank of Scotland Group (LSE: RBS), unquestionably the baddest of the bad since 2008, is down 23%.

Big and bad

This has been a tough three years for stock markets generally, but not THAT tough. The FTSE 100 is down “just” 4.75% over the same period. Banks have been a dreadful place to put your money in recent years, as the optimism generated during the share price recovery in 2012 and 2013 proved illusory. All three are down around 30% in the last year alone. Which looks like a buying opportunity if ever I saw one.

Barclays, HSBC and RBS have picked up in recent days, helped by a surprisingly timid report from the Competition & Markets Authority. At some point investors feared the CMA might even order the big retail banks to be broken up to boost competition and get customers switching. There was also talk of forcing banks to renounce their ‘free’ banking model and insisting they charge for current accounts instead. Instead, the CMA brought forth a mouse, including a limit on overdraft charges and a new comparison site to make switching easier, as if the world needs more comparison sites. But it’s good news for the big four.

The tragedy continues

As Tolstoy pretty much wrote: all happy banks are alike, each unhappy bank is unhappy in its own way. Barclays is still battling to rundown its ‘bad bank’ while establishing its new retail and corporate & investment banking divisions. Dividend growth continues to disappoint with a forecast yield of just 1.7%. HSBC avoided the worst of the credit crunch but its share price has been punished by the emerging markets rout, leaving the yield on a crazy high of 7.71%. RBS remains the black sheep with no dividend and it also faces a further billion pounds of restructuring costs and £1.5bn of disposal losses in the Capital Resolution portfolio this year.

At some point the toxic sludge will melt away, along with today’s negative sentiment. The only question is when. I believe HSBC is the most attractive of the three, because you get a fabulous income stream while waiting for that question to be answered. Earnings per share (EPS) are expected to fall another 7% this year, but 2o17 may look a lot brighter, with EPS forecast to rebound 7%. Let’s just hope a Chinese hard-landing doesn’t get in the way.

Comeback kids

The problems and potential at Barclays can be summed up in its forecast EPS figures: a drop of 18% this year, a leap of 57% next. If you can take the short-term pain, there could be plenty of long-term gain. At some point, the banks will enjoy another burst of share price recovery, until they become what they always should have been, steady long-term income plays.

Barclays and HSBC could easily thrash the FTSE 100 over the next five years. One day, RBS should also return, Lazarus-like, from the dead. You just might have to wait a bit longer for that. Miracles take time.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.