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Barclays PLC Vs Lloyds Banking Group PLC: Which Bank Should You Buy?

The last year has been disappointing for investors in Barclays (LSE: BARC) (NYSE: BARC.US) and Lloyds (LSE: LLOY) (NYSE: LYG.US), with the two banks seeing their share prices being flat and falling by 6% respectively. Both have underperformed the FTSE 100’s performance of +2% but, as ever, the past is not an accurate guide to the future and so, looking ahead, which one will be the better performer?

Valuation

Clearly, both stocks are very attractively priced. However, after a 2013 calendar year that saw its shares soar by 61%, Lloyds is the more richly valued of the two banks. Evidence of this can be seen in their price to book (P/B) ratios, with Lloyds having a P/B ratio of 1.37 and Barclays having a P/B ratio of just 0.66. As a result, Barclays appears to be hugely undervalued relative to its sector peer, with it being difficult to justify such a low rating now that its future prospects appear to be so bight.

Strategy

Of course, a major reason for its bright future is the strategy that has been put in place by current CEO, Anthony Jenkins. Under him, Barclays is attempting to significantly reduce the riskiness of its activities and also pull out of operations that require too much capital for too little return. And, although progress has not perhaps been as fast as the market would like it to be, Barclays is certainly in a much stronger position now than it was a few years ago.

In fact, Lloyds has pursued a similar strategy in recent years and, while it is not yet back to full health, it also seems to be moving in the right direction. And, with the UK economy continuing to improve, both banks seem to have bright longer term futures.

Efficiency

However, where Lloyds is considerably further ahead than Barclays is with regard to its efficiency. For example, its cost:income ratio is among the lowest in the UK banking sector and is forecast to be as low as 45% by 2017. If met, this would be hugely impressive and show that Lloyds has got a real grip on its cost base and has streamlined its operating activities.

Barclays, meanwhile, reported a cost:income ratio of 67% in its first half of 2014. While not among the highest in the banking sector, it clearly has a long way to go before its work of making the business more efficient is complete. As a result, Lloyds appears to be the more efficient of the two banks.

Risk

Clearly, the UK and global economic recovery remains somewhat fragile – especially while the Eurozone’s future is apparently hanging in the balance. Therefore, both banks could see their share prices come under pressure as a result of negative macroeconomic news flow.

However, Barclays appears to be the more volatile of the two banks, since it has a beta of 1.47 versus just 1.05 for Lloyds. This means that Barclays’ share price should (in theory) move by 1.47% for every 1% change in the value of the FTSE 100, which is considerably greater than the 1.05% that Lloyds’ share price is expected to move by.

Looking Ahead

Despite its higher beta and less appealing cost:income ratio, Barclays still appears to be the better buy of the two banks. That’s mainly because it is so much cheaper than Lloyds, but also because it has no government shareholder and so has less political risk, as well as having a superb track record of profitability, with it remaining profitable throughout the credit crunch, unlike Lloyds which made severe losses.

So, while both banks seem to be worth buying, Barclays appears to be the better buy at the present time. Of course, they're not the only stocks that could be worth buying, which is why the analysts at The Motley Fool have written a free and without obligation guide called 5 Shares You Can Retire On.

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Peter Stephens owns shares of Barclays and Lloyds Banking Group. 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.