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Why Barclays plc and Royal Bank of Scotland Group plc could be the banks to watch in 2018

What has surprised me almost as much as the banking crisis itself is the depth of the hole they dug themselves into and the length of time it’s taking to climb out. Sentiment, at least among the general public, still seems to be aligned with the thought that bankers are pariahs.

But what I’m actually seeing is a much invigorated sector, and I’m coming to think that Brexit will not do as much harm to the banks as some folk think. But which will do best?

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Long-term champion?

Barclays (LSE: BARC) shares really haven’t recovered too well yet, still being down close to 20% over the past five years. And I know dividends are still low, expected to yield only 1.5% in 2017. But forecasts suggest that should nearly double in 2018 to take the yield up to 2.8% — and then it would be covered more then three and a half times by earnings.

Barclays’s third quarter results looked pleasing to me, with chief executive James E Staley making the key observation that “The third quarter of 2017 was particularly significant for Barclays as it was the first for many years in which we have not been in some state of restructuring.” He went on to tell us the bank is setting new targets for 2019 and 2020, and I really do think we’re pretty much back to ‘business as usual’ now.

I’m also expecting these early yield rises to become an echo of what has already happened at Lloyds Banking Group, whose return to dividends started off modest and quickly ramped up to something very attractive indeed. Lloyds is expected to provide a 6.8% yield in 2018, covered 1.6 times by earnings — the same future cover at Barclays would suggest a possible dividend yield of around 6.3%.

One significant fear is that there might be further regulatory punishments in store for Barclays, but that’s been weighing the shares down for a number of years now, and I think it’s overdone.

Slow and steady

My second pick bears comparison with Lloyds, too. It’s Royal Bank of Scotland (LSE: RBS), the bank that was well and truly shredded as the banking disaster unfolded. 

As one of the worse affected, it’s not surprising that it’s taken longer to pull itself back up by its bootstraps — and I’ve been bearish about its prospects for some time, seeing its shares as overvalued when compared with the black horse bank which always seemed a couple of years ahead.

But RBS finally looks set to be back to sustainable profits from 2017, with 2018 forecasts putting the shares on a P/E multiple of under 11. 

This year’s predicted dividend would only yield 0.2%, but it’s symbolic more than anything — it’s telling us that the bank is finally back to the kind of liquidity and cash flow that satisfies the regulatory bodies that it can resume handing out cash to shareholders.

The bank’s third quarter update was also encouraging, reporting three successive quarters in a row of profit — pre-tax profit for the period came in at £871m, and the board told us that “RBS remains on track to achieve all of its 2017 financial targets.

Both banks came through the latest Bank of England stress tests with no problems, and I reckon 2018 really could be a great year for them both.

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Alan Oscroft owns shares in Lloyds Banking Group. 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.

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