Few people have a kind word to say about banking giants Barclays (LSE: BARC) and Royal Bank of Scotland (LSE: RBS), and understandably so. No one likes them. Should you care? Actually, there are good reasons why you should.
You don’t need me to remind you why these two big banks are so reviled. Just cast your mind back to the financial crisis, and the constant stream of rate fiddling and mis-selling scandals that have plagued the industry ever since.
Investors have few reasons to open their hearts either. Exactly 10 years ago, Barclays traded at 661p. Today its share price stands at just 221p. RBS fell from 5561 to 261p. Its performance graph since 2009 is a flat line.
Yet there have been signs of life lately. Barclays is up 25% over the last year, RBS is up 11%. True, there have been plenty of false dawns before, quickly curtailed by the banks’ many legacy issues. Yet these are still two massive operations, with market caps of £36.39bn and £31.06bn respectively, and cannot just be written off.
Slowly does it
Barclays recently doubled its first-quarter profits to a hefty £1.7bn, thanks to a strong performance from its core business and reduced losses in its non-core bad bank, which fell from £815m to £241m. So the good bank is growing and the bad bank is dying. Bad loans, restructuring and conduct compensation cost Barclays £1.2bn in Q1, but if it can keep its nose clean these numbers could drop, boosting the bottom line.
Last month, RBS reported profits of more than £1bn from its core operations. Its capital resolution division is winding down, which should free up reserves and boost the bank’s solvency ratio. Again, the direction of travel is good, but slow, so slow there are signs that Chancellor Philip Hammond is losing patience and may offload RBS even at a loss to taxpayers.
The big problem facing both banks is that underlying growth in core UK banking is likely to be modest, due to tight regulatory supervision, stiff competition from established rivals, and the challenger banks. Government, consumer and corporate debt will also weigh on their core operations. Low interest rates make it difficult to boost net margins.
Both banks need to rebuild their dividends to lure back investors, although with Barclays on a forecast yield of just 1.5%, there is a long way to go. It does have brighter prospects, with analysts calculating that earnings per share (EPS) could rise 57% this calendar year and 18% in 2018. By then, the yield may have crept up to 3.8%.
RBS doesn’t pay any dividend at all. However, it is forecast to turn last year’s £4bn loss into a profit of £963m in 2017, then £3.5bn in 2018, so hold onto your hats. EPS are forecast to rise a whopping 279% in 2017, then 16% in 2018. Analysts are optimistically pencilling-in a dividend revival, with a yield of 3.4% by the end of next year, although I wouldn’t bank on that. RBS is currently valued at a a sky-high 50 times earnings but this is forecast to fall to just 13.5 times earnings. Ignore the haters, it might just be time to show Barclays and RBS some love.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.