How Barclays PLC, Lloyds Banking Group PLC And Royal Bank Of Scotland Group PLC Will Fare In 2015

One of my current investment themes has been a contrarian play on the banks Barclays (LSE: BARC), Lloyds (LSE: LLOY) and Royal Bank of Scotland (LSE: RBS).  I felt that the share prices of the banks, beaten down by the Credit Crunch and the Great Recession, would rise as bad debts were reduced and the economy, businesses and the housing market recovered.

As we embark upon a new year, I thought I’d take the opportunity to see how these investments were progressing, and think about how they would fare this year.

Fluctuating share prices, but improving fundamentals

The banks had a stellar 2012, with all three banks doubling or nearly doubling in value. 2013 was broadly positive, with these companies’ share prices either rising or treading water. But 2014 was a disappointment, with both Barclays and Lloyds edging downwards, though interestingly RBS began gradually to trend upwards.

As always, you need to look through the share price variations to understand what is happening with the fundamentals. Across all of these banks, there has been a broad improvement in many of the metrics. The core tier one ratios have increased, bad debts have been falling, and this has meant that profitability has been rising.

I think the most crucial point is that bad debts have been decreasing. Barclays was perhaps the strongest of these companies in the immediate aftermath of the Credit Crunch, and so its profitability recovered first, along with its share price.

Lloyds has suffered much more during the recession, but as the housing market recovered and property prices increased, its profitability and share price trended upwards in 2013.

Of all the banks, Royal Bank of Scotland was hit the hardest by the financial crisis so, not surprisingly, it has taken the longest to recover. But it’s amazing how time can heal wounds. Last year, finally, we saw losses turn to profits, and the range-bound share price at last began to rise.

Overall, a positive picture

There are still, however, negatives and concerns. Fines and payments from PPI and scandals such as exchange-rate rigging are still being incurred. Falling commodity prices mean that the inflation rate will be close to zero, and that interest rates will remain low longer than just about anyone had predicted, reducing bank profits.

However, falling oil and gas prices will also boost an economy which is already recovering, as consumers realise they have more money to spend.

Overall, the picture is positive, and I expect bank share prices will be higher by the end of the year. Will 2015 be the year that the banks finally begin churning out profits consistently? It just may be.

As the banks' profitability recovers, we are beginning to think of these firms as potential dividend investments. If you are interested in high-yield shares, we have written a guide to this key investing technique.

Want to learn more? Well, just click on this link to read "The Fool's guide to dividend investing" – it's available free and without obligation.

Prabhat Sakya owns shares in Barclays, Lloyds and Royal Bank of Scotland. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.