Lloyds Banking Group PLC Is The Best Of A Bad Bunch Of Banks

Good, Better, Best?

A note by Investec analyst Ian Gordon has just caught my eye, noting that HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) has outperformed the other major UK banks this year. I looked at the figures, and its share price is actually down 7% over the past three months. Over six months, it is down 10%. If that’s outperformance, heaven help the rest.

This has been a tough spell for the banking sector. Barclays (LSE: BARC) is down 10% in three months, Royal Bank of Scotland is off nearly 8%. This makes Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) the recent winner, with a drop of less than 5% over the same period. It is the best of a very bad bunch.

hsbcI like investing in good companies on bad news. With the banks, it’s a case of investing in bad companies on bad news. Like Investec’s Ian Gordon, I have my doubts about HSBC. I’ve been worried about its exposure to China. Management seems short of confidence, preparing investors for bad news with its recent warning of “greater volatility in 2014 and choppy markets”. Gordon is concerned by “weak balance sheet growth, weak revenues and only mild cost containment that drive sub-target results”.

Toxic Tale

I recently sold my stake in Royal Bank of Scotland. My decision to load up on the stock when it traded at 21p paid off, cancelling out my losses from an earlier purchase at 50p. Honour satisfied, I had little appetite for holding on through years of political machinations in the run up to eventual privatisation. RBS still has a long way to go to detoxify its brand. The lack of a dividend does nothing to ease what will remain a bumpy ride. RBS will get there in the end, but will others get there faster?

barclaysI would rather hop on board Barclays right now. As I’ve written several times lately, its recent share price plunge makes it a tempting buy. Given the volatility now inherent in this sector, it makes sense to buy banks on the dips, provided you have the patience to hold for year after year. If you do, Barclays is forecast to yield of a juicy 5.6% by December 2015. Unless you’ve written off the banking sector altogether, Barclays looks a buy to me at today’s price.

So what about the best of the bad ‘uns, Lloyds? Investors have had to wait a long time for a buying opportunity, it is up 150% over two years. The share price was knocked by the government’s latest stock sale, however, which could give nippy investors a chance to lock in at a lower price. Broker Numis has just upped its target price to 97p and upgraded Lloyds from ‘add’ to ‘buy’. Today you pay 77p, giving you plenty of potential upside.

LLOYBarclays Gets Better

The taxpayer still holds 25.5% of Lloyds. Given the impact of the recent share sale, you can expect further setbacks every time a new tranche is offloaded (which bodes ill for RBS). Although if Lloyds gets the green light to restart dividend payments later this year, that will raise spirits.

My worry is that Lloyds is now a UK-focused operation. That puts the lid on how big it can become, especially with recent economic data suggesting the UK recovery is beginning to slow. Lloyds has been the best lately. Barclays now looks the better bet for the future.

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Harvey doesn't own any shares in any company mentioned in this article.