2014 has been a major disappointment for the banking sector. Indeed, the five major banks; Barclays (LSE: BARC), Lloyds (LSE: LLOY), RBS (LSE: RBS), HSBC (LSE: HSBC) and Standard Chartered (LSE: STAN) have all endured a difficult year-to-date. In fact, until today’s spike in RBS’s share price, all five banks had underperformed the FTSE 100. Indeed, what makes the performance even more disappointing is the fact that the FTSE 100 has gained just 1% so far this year.
However, the future is unlikely to be anything like the past for the five major UK listed banks. Moreover, all five banks have the potential to double in value. Here’s why.
Profitability Is Improving
A key problem for the banks since the start of the credit crunch has been asset write-downs. This has hit profits hard, since write-downs are a minus figure on the income statement, and has meant that RBS and Lloyds, for example, have failed to make a net profit since the credit crunch began. However, as RBS’s results today show, the banks are not only writing down assets to a far smaller extent than previously, they are actually starting to write them back up. The reason for this, to a large extent, is an improving economy that makes fewer loans turn bad. As such, banks are set to not only return to profitability (in the case of RBS and Lloyds), but grow them significantly, too.
Growth Is Making A Comeback
Indeed, bottom-line growth looks set to be strong for all five banks. For example, HSBC is forecast to increase earnings per share (EPS) by 9% in each of the next two years, while Barclays is set to increase its profit by 39% this year and by 23% next year. Those are hugely impressive growth numbers and show that the banks really are making a strong comeback.
A key reason why the banks could double in value is that they are priced at incredibly low levels at present. Their price to book values are staggeringly low and appear to factor in vast write-downs which, judging by the pace of growth of the UK and world economies, is unlikely to take place. For instance, the price to book ratios of the five banks range from just 0.4 for RBS to 1.4 for Lloyds, with Standard Chartered, Barclays and HSBC all having price to book ratios of 0.65. All of these figures are extremely low and highlight the fact that the five banks are a steal at current prices.
Peter Stephens owns shares of Barclays, HSBC Holdings, Lloyds Banking Group and Royal Bank of Scotland Group. The Motley Fool owns shares of Standard Chartered.