What’s Gone Wrong at Lloyds Banking Group PLC, Aviva plc & Prudential plc?

It has been a rough year for financial stocks with top UK banking and insurance company names registering double-digit annual drops. Should you follow the money and head for the exit, or bank on a blistering rebound?

Fraught financials

Lloyds Banking Group (LSE: LLOY) is the UK’s most traded stock but investors have been on a loser lately, with the share price down 18% over the past 12 months. Insurance giant Aviva (LSE: AV) has been a fixture in my portfolio for some years but I’m definitely on a downer, with the stock falling 22% in the last year. I also hold Prudential (LSE: PRU) and the 23% drop in its share price over 12 months has cost me dear. Show me the money? I wish I’d shown a clean pair of heels.

Worse, the bad news keeps on coming. All three stocks are down over six, three and one months, and even over the last week. 

Unfunny money

I’d expected better of Lloyds, given that I named it as my stock pick of the year back in December. It should be doing better after posting an underlying profit of £8.1bn for the year to December 31, up 10%, with the underlying return on equity hitting 15%. It even appeared to have drawn a line under the PPI misselling debacle, and best of all, the dividend is back.

Lloyd looks set to become the income machine of yore, with a forecast yield of 6.6% for December. Recent share price woes partly reflect growing fears over the UK economy, given the bank’s relentless domestic focus. Even if the UK holds up, growth prospects may be low, because Lloyds is now a big fish in a small-ish pond, nipped at by hungry challengers. But with a prospective yield of 7.8% by December 2017 and valuation of just 7.71 times earnings, it still looks on the money to me.

Viva Aviva? Me neither

But what do I know? I bought Aviva four-and-half-years ago and although I’m up 25% since then it hasn’t been my liveliest pick. Still, it posted healthy 2015 results, with a 20% rise in full-year operating profit to £2.67bn, as chief executive Mark Wilson steers a tighter ship. Despite recent slippage it trades at a pricey 19.1 times earnings, which undermines the charms of its 4.67% yield. Further synergies from the Friends Life integration and overseas disposals may help drive profits but I would still favour Lloyds of the two.

Boohoo Pru

Pru has doubled my money since I bought it in October 2009 but lately it has been throwing it away. As with Lloyds and Aviva, you can’t blame 2015 results: full-year operating profits rose 22%. It even shrugged-off the wider Asia slowdown. Again, the culprit is global stock market volatility, which has hit profits in Prudential’s US retirement business and its subsidiary fund manager M&G. At least the valuation looks more appealing than before, at 13.59 times earnings, and the yield has climbed to 2.89%. I’m holding on for a brighter future ahead.

All three stocks have been hit by global fears rather than individual horrors. All three deserve to come roaring back into form but global economic sentiment will be the decider of that.

If you fancy a smaller, whizzier growth prospect, we have one for you right here.

This mid-cap company has been putting on the style lately and one of the Motley Fool’s top analysts reckons it's the latest British brand with the potential to go global.

To find out its name all you need do is download our BRAND NEW report A Top Growth Share From The Motley Fool.

Click here to read this no obligation report. It will be yours in moments and won't cost you a single penny.

Harvey Jones owns shares in Aviva and Prudential. 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.