Shares in the banking sector thrashed the FTSE 100 in 2012. What are the chances they will repeat the trick this year?
The UK's banks had a great 2012: Barclays (LSE: BARC) ended the year up 49%; HSBC (LSE: HSBA) was up 32%; Royal Bank of Scotland (LSE: RBS) rose 61%; Standard Chartered (LSE: STAN) advanced 11%. However, the star performer was Lloyds Banking (LSE: LLOY) -- the black horse galloped away, its shares ended the year 85% ahead.
| Company | Price (p) | P/E (forecast) | Yield (forecast) | Market cap (£bn) |
|---|
| Barclays | 276 | 7.8 | 2.3 | 34 |
| HSBC | 666 | 11.8 | 4.1 | 122 |
| Lloyds | 50 | 20.0 | 0.0 | 35 |
| RBS | 334 | 19.3 | 0.0 | 20 |
| Standard Chartered | 1,610 | 12.2 | 3.2 | 39 |
I've taken a look at all five to try and believe that all will beat the market again in 2013.
Barclays
Shares in Barclays have recovered strongly following the LIBOR revelations and the departure of its controversial CEO, Bob Diamond.
Like Lloyds and RBS, Barclays is a high-beta share. This means that its movements have exaggerated the market's. So statistically, if 2013 is a good year for the market, we should expect Barclays to outperform it. In a bad year for the FTSE 100 (UKX), statistics suggest that Barclays would fall short.
The yield on Barclays' shares is better than what can be made on cash deposit or bonds. Moreover, Barclays shares are cheap. The company trades on just 7.4 times market expectations for 2013, well below the FTSE 100 average of 15.4.
HSBC
HSBC managed to make a profit and pay a dividend throughout the financial crisis. Of all the banks featured in this article, HSBC is probably the most geographically diverse.
The shares suffered in 2012 from an expensive money-laundering scandal. Without this, the outperformance would have been even greater.
As an investment, HSBC has three big things in its favour. First, it has an admirable track record -- it is a strong company that has come through an industry crisis intact. Second, it pays a good dividend. The dividend is expected to be increased 10.5% in 2013, to give a 4.5% yield. Third, the shares are cheap. HSBC currently trades at just 10.5 times expected 2013 profits.
Lloyds Banking Group (Lloyds)
Lloyds shares stole the show last year. That's despite the company incurring the largest Payment Protection Insurance provisions.
The UK taxpayer owns a 40% stake in Lloyds. The breakeven price on this is 63p. At todays price of 50p, just half of last year's percentage gain would put the government well into profit.
Lloyds will likely stop reporting big PPI provisions in its trading updates this year. Impairments at Lloyds have also been falling fast. As the UK economy recovers, Lloyds' fightback will continue. Improved profitability will dramatically increase the possibility of future dividends.
I expect that 2013 will be the year that Lloyds takes a huge step forward in its recovery.
Royal Bank of Scotland (RBS)
RBS is majority-owned by the UK taxpayer.
In May 2011, RBS shares were priced at 405p. This was followed by the near-meltdown of the eurozone, which pushed the shares close to 200p in the summer of 2012. Despite the huge rise enjoyed over the course of last year, the shares remain some distance below the price they stood at for most of 2010.
I believe that the market still regards RBS as the bank most at risk. This makes the share price volatile. I continue to hold my shares in the company for two reasons. First, the shares are cheap. With the last trading statement, the company confirmed a net asset value of 476p. That's 43% ahead of today's share price. Second, I am expecting that newsflow from the company will demonstrate how far RBS has come in its recovery.
If the shares can reach 450p then that would be a 39% rise on the year. I expect that kind of rise would easily surpass whatever the FTSE manages.
Standard Chartered
This is the bank that I most expect to beat the market in 2013.
Much of Standard Chartered's business is in the Far East. This means that when the FTSE 100 suffers due to concerns about the UK economy, eurozone or the US, the Standard Chartered share price is largely unaffected. So, even if 2013 is a bad year for the FTSE 100, that needn't mean Standard Chartered shares performs badly.
Furthermore, the way that I look at it, the shares are cheap right now. Standard Chartered's exposure to fast-growing Asian economies traditionally brought with it a high P/E rating. At this time in 2011, the shares traded on a forward P/E of 14.4. Today, the shares trade on just 11.7 times expected earnings for 2012 and 10.7 times expectations for 2013.
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> David owns shares in Lloyds Banking and Royal Bank of Scotland but none of the other shares mentioned. The Motley Fool owns shares in Standard Chartered.
