Why I’m Banking On 30%+ Gains From Lloyds Banking Group PLC, Royal Bank Of Scotland Group plc And Aberdeen Asset Management plc

A number of stocks in the financial services sector are currently underperforming. While this is disappointing in the short run, it provides an opportunity for long-term investors to buy-in at a discounted price ready for significant gains in the coming years.

For example, fund manager Aberdeen Asset Management (LSE: ADN) has posted a fall in its share price of 14% since the turn of the year as its focus on China has caused investor sentiment to decline. And while the company’s bottom line is expected to fall by 24% this year, its valuation appears to adequately reflect a disappointing short-term performance.

For example, Aberdeen has a dividend yield of 8% at the present time. Certainly, dividends aren’t particularly well-covered at 1.2 times, but even if the company cuts dividends its shares remain hugely enticing to income-seeking investors. In fact, if Aberdeen were to trade 30% higher it would still be yielding 6.2% and would remain in the upper echelons of FTSE 100 high-yield stocks. With interest rates due to remain low this year, Aberdeen could mount a very strong comeback.

Upward rerating potential

Similarly, shares in RBS (LSE: RBS) have fallen by 17% since the turn of the year as fears for the global economy have weighed heavily on banking shares. And with RBS still not yet fully recovered from the debilitating effects of the credit crunch, investors seem to be losing patience with the part-government-owned bank.

However, patience could be rewarded when it comes to RBS. It trades on a price-to-book value (P/B) ratio of just 0.6 and this indicates that there’s huge upward rerating potential. Certainly, during a recession when major asset writedowns are possible, a wide discount to book value is easy to justify. However, the current uncertainties in the global economy appear to be insufficient to merit such a low valuation. Were RBS to post a rise in its share price of 30% it would still trade on a highly appealing P/B ratio of 0.8.

Making progress

Likewise, Lloyds (LSE: LLOY) also offers at least 30% upside. While the government’s decision to delay the sale of its stake in the bank may be somewhat disappointing, Lloyds is still making excellent progress towards becoming a leaner and more profitable entity. Despite this, it trades on a price-to-earnings (P/E) ratio of just 8.4 and this indicates that a major upward rerating is on the cards.

Were Lloyds to trade 30% higher, it would still have a remarkably low P/E ratio of 11. Given that it continues to improve its efficiency and streamline its operations, such a rating would be easy to justify. With Lloyds expected to increase dividends this year to give a yield of 5.6%, it remains a highly attractive yield play too.

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Peter Stephens owns shares of Aberdeen Asset Management, Lloyds Banking Group, and Royal Bank of Scotland Group. The Motley Fool UK has recommended Aberdeen Asset Management. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.