The banking sector should have a good 2014, as bank shares are generally correlated to the economies in which they operate. But each of the UK’s banks face different prospects and challenges. How do Barclays (LSE: BARC) (NYSE: BCS.US), Lloyds (LSE: LLOY) (NYSE: LYG.US) and RBS (LSE: RBS) compare?
Momentum
Lloyds has momentum. Its shares have risen 62% over the past twelve months, pushed by progress in its restructuring plan and the successful sale of government shares. Three factors should provide further momentum throughout 2014:
- A buoyant economy and booming housing market. Lloyds provides a fifth of all UK mortgages, demand for which is being stimulated by the government ahead of 2015’s general election.
- Progress on Lloyds’ transformation and the resumption of dividend payments.
- Further disposal of the government’s shares. A sale based on publication of Lloyds’ results in March would coincide with Vodafone shareholders reinvesting their cash receipts. A retail tranche is likely.
In the longer term, Lloyds’ dependence on UK retail and commercial banking limits its growth prospects, but with a 70% payout policy it could become a good income stock.
Downward cycle
RBS’s immediate future is less clear. It’s less far on with its transformation plan than Lloyds, so there should be plenty of upside for patient investors. And a healthy economy will accelerate the disposal of bad and non-core assets, including US subsidiary Citizens Bank. But the new CEO is cautious on timing.
The bank has acquired an accident-prone reputation: tussles with the government over strategy, losing its finance director after 10 weeks, allegations that it pushed businesses into administration, and a series of IT breakdowns that hint of fundamental systems issues.
RBS could surprise on the upside or the downside in 2014. But on a downward earnings-rating cycle, they’re not on my buy-list.
World class
Barclays has also had a difficult year. An unexpected imposition of a leverage ratio forced a deeply-discounted rights issue. That put back the transformation plan by a year and dilutes future earnings. Capital markets activity hasn’t grown as much as the general economy, so investment banking, which contributes around 40% of Barclay’s business, hasn’t fared as well as retail banks.
But Barclays’ investment bank is now world-class, and it has valuable businesses in Barclaycard and Africa which together make more money than its retail bank. 2014 won’t be a great year, but in the longer term Barclays has the biggest upside. And it pays a real dividend, something the other two banks can’t yet boast.
