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Can the Lloyds share price beat Barclays and the FTSE 100 again in the second half of 2019?

2019 has been another patchy affair for the big banks. As the half year draws to a close, the Barclays (LSE: BARC) share price trades at roughly the same level it was on 1 January. That makes Lloyds Banking Group (LSE: LLOY) look relatively good, as its stock has climbed almost 12% to 57p against 9% on the FTSE 100 as a whole.

Taking their time

I’m glad to see the Lloyds share price finally showing a bit of momentum, as I have been tipping it for ages. Although frankly, I’d hoped for more than this.

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Escaping the past is a lot harder than you might imagine. It is now 12 years since we got the first rumblings of trouble in the banking sector, and still it hasn’t been fully cleaned up. This matters to investors because the regulatory punishments for misdemeanours are tough, as Lloyds’ subsidiary Bank of Scotland knows to its cost after recently being slapped with a £45.5m fine for failing to report suspicions of fraud at its HBOS operations in Reading a decade ago.

At least investors can breathe a sigh of relief after 29 August, when the final deadline for PPI mis-selling claims passes. Lloyds was the worst offender and has shelled out around £20bn in compensation. That sorry chapter will soon close.

On the up

Hope springs eternal and we keep returning to the sector hoping this time it will deliver on its undoubted potential. There is hope, as both banks dispose of non-core operations, cut costs, build core equity ratios and strengthen balance sheets.

They are also repairing their dividends, with Lloyds now yielding 5.63% with more to come. One day it could even be the best dividend stock on the FTSE 100. Barclays yields 4.34%.

Nice price

They are also cheap, with Lloyds trading at just 7.7 times forward earnings on a price-to-book (P/B) ratio of 0.8. Barclays looks even cheaper trading at just six times forward earnings with a P/B of 0.4.

So why aren’t people rushing in to buy at these prices? Well, there’s Brexit. Need I say more? Then there is concern over the slowing global economy, which could trigger a rise in bad debts, as well as a fall in new mortgages and loans as customers and businesses retrench.

Banks face an ongoing struggle to increase net interest margins and it isn’t going to get easier, as global central bankers all turn dovish at the same time, which makes you wonder if interest rates will ever rise.

Another challenge

In the UK, the authorities are trying to stir up competition by unleashing the challenger banks, who will also snaffle market share. Regulators are also clamping down on any signs of abuse, with the Financial Conduct Authority’s latest target the “dysfunctional” overdraft market, from which banks generate £2.4bn a year from charges.

High and rising yields continue to make a strong case for banking stocks, and many of the sector’s problems are priced in. Barclays stock might even double your money in the longer run. 

I still think Lloyds and Barclays should make a great long-term buy and hold, for the very patient. Lord make me a banking investor, just not yet!

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Harvey Jones has no position in any of the 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.