There are lots of reasons to be sceptical about the big UK banks, but any serious investor can’t simply dismiss them. The likes of Barclays (LSE: BARC) (NYSE: BCS.US), Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) and HSBC grease the wheels of the UK economy, and boast millions of retail and business banking customers. If the UK economy continues to recover, they should as well.
This is also a sector in recovery mode, following their near-wipeout in the financial crisis. As in any recovery, there have been plenty of stumbles along the way, including profit slumps, bad banks, bonus scandals, job losses, regulatory creep, and endless rigging and mis-selling penalties.
Their bread-and-butter UK retail banking operations face growing competition from a string of challenger banks, with Tesco the latest to offer a current account to dissatisfied customers. This is a despised sector in the midst of uncertain transition, but I still think there are opportunities for investors.
I’d Buy Barclays
In recent months I’ve been alerting long-term value seekers to the fact that Barclays is now 25% off its 12-month high. And rightly so, with the bank sparking a shareholder revolt over bonuses for failure, then taking a hatchet to its investment banking division, ending dreams of conquering Wall Street.
And I’d Buy Lloyds
Would you want to invest in the incredible shrinking bank? With forecast earnings per share growth of 45% this year, Barclays now trades at just 9.9 times earnings for December. So the price is tempting. As the dividend recovers, it should yield 4.7% by December 2015. Barclays is definitely one to consider, and so is Lloyds Banking Group.
Lloyds has returned a handsome 171% over the past two years. That’s the kind of reward the once-stolid banking sector offers investors who take a punt when nobody else wants to know. I wouldn’t bank on a repeat of that performance, however, as the bank returns to the days of low-risk retail and commercial banking, but the recent 22% rise in Q1 profits to £1.8 billion can’t be ignored.
Lloyds is also shrinking, exiting around 20 countries in a streamlining maneouvre. But one day soon, its dividend will return. And trading on a forecast 10.8 times earnings for December, at least investors aren’t being overcharged.
But I Wouldn’t Buy RBS
While patience is the key to successful investing, you can take that principle too far. How long do we have to wait for Royal Bank of Scotland Group (LSE: RBS) to get its act together? How long have you got? RBS has more legacy issues than Dickens’ interminable Jarndyce v Jarndyce Chancery suit in Bleak House.
Hampered commercially by its 81% taxpayer stake, stricken by scandal, choked by impairment and restructuring costs, and with that state sell-off constantly receding, RBS is still toxic.
It posted a £8.2 billion a pre-tax operating loss last year and you don’t even get a dividend as reward for sticking by the stock. I can be patient, but I like a few treats along the way. I’d buy the other big banks right now, but I wouldn’t buy RBS.
