The Lloyds and Royal Bank of Scotland share prices have seen quite a rally so far this year. They’ve gained 23% and 22%, respectively.
Meanwhile, their FTSE 100 peer Barclays (LSE: BARC), and mid-cap merchant bank Close Brothers (LSE: CBG), which released its half-year results today, have fared less well. The former is up 9% and the latter just 3%.
Could the two laggards be primed for a comeback, and market-smashing returns?
Prudent positioning
Close is an admirable bank with a service-led business model, disciplined approach, and commitment to investing through the cycle. Its philosophy saw it perform resiliently through the Great Financial Crisis, even maintaining its dividend amid the devastation all around it.
Today’s report for the six months ended 31 January was peppered with words such as ‘prudent’ and ‘conservative’. Management isn’t chasing growth in competitive areas of the market, but is focused on maintaining pricing discipline and prioritising credit quality. If history is any guide, you won’t find Close has been swimming naked when the economic tide goes out.
Rich rating
The Banking division delivered a modest 1% increase in adjusted operating profit in the latest period. Meanwhile, its smaller Asset Management and market-making (Winterflood) businesses remained profitable, but saw profits decline year on year. Net inflows in Asset Management were more than offset by negative market movements, while Winterflood was impacted by lower trading volumes. As a result, group adjusted operating profit was down 4%.
I’m expecting a similar outturn for the full year, and conservatively estimate EPS in the region of 136p and a dividend of 65p. At a share price of 1,480p, this gives a price-to-earnings (P/E) ratio of 10.9 and a dividend yield of 4.4%. Along with a price-to-tangible net asset value (P/TNAV) of 1.98, this is a rich rating relative to Footsie peers.
I don’t think now is the ideal time to buy the stock, but it’s a bank I’d be happy to hold through the economic cycle. I rate it a ‘hold’ at this stage.
Classic value opportunity
Barclays is dirt cheap compared to Close. At a share price of 163p, it has a P/TNAV of 0.62 and trades on a forward P/E of 7.4, with a prospective dividend yield of 4.6%. Of course, while Close has built an excellent reputation for trust among its customers and shareholders, Barclays has been a scandal-ridden business for years. It’s paid a heavy price for past misdeeds, both in financial terms and investor trust.
Given that the current management team is untainted by the past, and increased regulatory scrutiny since the financial crisis, it’s hard to believe Barclays will be quite as ‘accident-prone’ in the future. And with its latest results showing an improving financial performance, I can certainly see there’s a case, as my Foolish colleague Roland Head has argued, that Barclays represents a classic value investing opportunity.
More cautious view
On the other hand, I’m concerned about where we are in the economic cycle. And also about the fallout of a possible no-deal Brexit, which has another of my Foolish colleagues, Alan Oscroft, holding back some cash for potential post-Brexit banking bargains.
If Roland’s right, Barclays could smash the FTSE 100. However, I think this is one that really could go either way. On balance, I lean towards the more cautious position of avoiding the stock for the time being.
