It came as a surprise to me to discover at the weekend that Lloyds (LSE: LLOY) (NYSE: LYG.US) has overtaken Barclays (LSE: BARC) (NYSE:BCS.US) in market capitalisation. According to Euromoney, Lloyds has enjoyed the biggest growth in market cap of any bank in the world in the last 18 months.
Lloyds is enjoying positive momentum, with lots of positive news flow. It has made faster-than-expected progress in shedding non-core assets, and there have been external factors as well. With its shares crossing the threshold price, it now looks almost certain there will be a sale of the government’s 39% stake before 2015’s general election. And with most of its business in the UK and a 25% share of the mortgage market, it has benefited from signs of recovery in the UK economy.
The bank is a direct beneficiary of Chancellor George Osborne’s schemes to boost the housing market. The extension of the Help to Buy Scheme to existing properties from 2014 will further boost mortgage lending. With management and government keen to see the back of each other, we can expect more good news.
So Lloyds should remain buoyant, unless the festering instability of the eurozone breaks out into a financial market meltdown.
Tortoise versus hare
But longer term, Barclays has more potential for share price growth.
First, there’s a simple matter of valuation. Lloyds is trading on 1.1 times book value, Barclays just 0.7. Lloyds multiple is nearer what a normally healthy bank’s multiple should be. I think the market is unduly suspicious of Barclays’ balance sheet.
Second, Barclays has a much bigger market to play in. Lloyds is limited by the size of the UK economy, so there’s room for recovery but nowhere to go after that. Barclays has a global market-place for investment banking and Barclaycard, and has set its sights on Africa.
Third, Barclay’s competitive position will strengthen as Lloyds’ weakens. Barclays’ gamble on buying Lehman’s US investment banking business at the height of the financial crisis is now paying off as it emerges as one of the few global investment banks. That activity may not be flavour of the month, but once financial markets return to normality then it will be a money-spinner again.
Lloyds’ UK retail banking market share will shrink when it eventually disposes of its TSB branches. As well as TSB, the branches RBS must sell and Tesco’s and Sainsbury‘s banks will be additional competitors.
If the global economy recovers without any serious shocks, bank shares should see steady growth over the next few years. But that’s not an insignificant risk.
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> Both Tony and The Motley Fool own shares in Tesco, but no other shares mentioned in this article.