Shares in Lloyds Banking Group (LSE: LLOY) and Barclays (LSE: BARC) have been battered by this year’s stock market crash. But the latest figures from each bank suggest to me that they will be able to survive the Covid-19 pandemic without too many problems.
Although dividends at both banks have been suspended by order of the regulator, this won’t last forever. Is it time to think about buying shares in these big banks?
Two stocks, one story
Barclays and Lloyds’ UK retail banking divisions are direct competitors, selling mortgages, loans and credit cards. But there are some differences.
Barclays boss Jes Staley has maintained the bank’s investment banking division and US operations, despite opposition from some investors.
By contrast, Lloyds is 100% focused on the real UK economy. Its business is built around mortgage lending, car finance, consumer lending and business banking.
You might expect these contrasts to have caused the bank’s share prices to perform differently over the last five years. But they haven’t. Since May 2015, both Barclays and Lloyds shares have fallen by 65%.
The only difference is that Lloyds shareholders have enjoyed bigger dividends.
What’s next for banks’ shares?
In my view, the reason why both banks’ shares have performed similarly comes down to the financial crisis. This created such an incredible mess for the big UK banks that it’s taken 10 years to resolve.
The PPI scandal put particular pressure on profits at all the big high street banks.
Bank shares certainly haven’t been my best investment in recent years. But I think that we will now start to see real differences emerging between the banks.
Lloyds shares dip despite smaller Q1 losses
The Barclays share price rose last week after the bank said income from its s investment banking division rose by 44% to £3,617m during the first quarter. This was driven by high levels of trading and volatility during March’s market crash.
Although this probably won’t be repeated during the next three months, it helped to offset a new £2.1bn allowance for expected bad debts following the coronavirus pandemic.
As a result, Barclays’ pre-tax profit for the first quarter only fell by 40% to £900m. By contrast, Lloyds’ pre-tax profit for the same period fell by 95% to just £74m.
Lloyds’ shares dipped after its Q1 results, but the group’s boring portfolio of loans to UK borrowers looks much safer to me than Barclays’ more exotic lending. While Lloyds now expects 1.3% of its total lending to go bad, the figure for Barclays is 2.2%.
Why I’d buy Lloyds shares
I think that Barclays and Lloyds shares both offer decent value at current levels. I believe that both banks have the financial strength to handle the losses that are likely to result from the Covid-19 pandemic.
In time — probably next year — I expect dividend payments to resume.
My only concern is that both banks may continue to struggle with low profitability. Ultra-low interest rates and tough competition for new lending mean that profit margins are very low. I suspect that lending activity will slow over the next year, putting further pressure on profits.
I think there are more profitable investment opportunities elsewhere. But if I was buying today, I’d choose Lloyds shares. Over time, I think its simple business model should deliver more consistent results — ideal for a dividend stock.
