Lloyds Banking Group (LSE:LLOY) has been one of the FTSE 100’s top-performing shares since 2020. But looking ahead, I’ve got my eye on a different name in the banking sector.
Over the next five years, I expect Barclays (LSE:BARC) to fare better. The stock’s outperformed in recent times and I expect this to continue.
Investment banking
Operationally, Lloyds is focused almost exclusively on retail banking. Barclays, by contrast, combines its retail presence with a major investment banking operation.
Over the last few years, Lloyds has had an advantage. Higher interest rates have resulted in wider lending margins, while investment banking has been largely subdued.
There are however, signs this is starting to change. Interest rates have started to come down on both sides of the Atlantic and analysts at JP Morgan expect this to continue in 2026.
The effects on investment banking are already visible. Over in the US, all of the major banks reported significant growth in investment banking revenues in their Q3 reports. At Goldman Sachs, for example, revenues in this part of the business were up 42%. And I think the prospect of falling interest rates means this is likely to continue.
While Barclays isn’t in the same league as Goldman when it comes to investment banking, I’m anticipating growth in this part of the business. And this should help the share price.
US credit
I’m expecting Barclays shares to outperform Lloyds over the next five years. But the overall picture isn’t as simple as one having an investment banking unit where the other doesn’t.
Since US consumers started repaying student loans (this was paused during Covid-19) their finances are becoming stretched. As a result, 90-day delinquencies have been on the rise.
This is a potential issue for lenders and Barclays has a significant US credit card operation. Lloyds, by contrast, doesn’t have anything like this kind of exposure. That’s a potential threat to my view going forward – and a risk for Barclays as an investment. But it’s worth keeping the scale of the issue in context.
In terms of revenues, the firm’s investment banking division is about five times the size of its US consumer business. So I’m anticipating strength in one to offset weakness in the other.
If credit card problems start blowing holes in the balance sheet, then the situation might be different. But for the time being, I think this is a risk to monitor, rather than worry about.
FTSE 100 banks
Over the long term, I expect interest rates to be high at times and not at others. And my sense is that Lloyds will do better when they are and Barclays will outperform when they aren’t.
In terms of where we are right now, the direction of travel looks to be relatively clear. Interest rates look set to fall, the only questions are: how far and how fast?
Lower rates should boost investment banking activity and Barclays stands to benefit. Given this, I think it’s the FTSE 100 bank for investors looking at the next five years to do further research into.
