UK financial institutions have underperformed in 2020. British stocks such as Barclays (LSE:BARC) and Lloyds Banking Group (LSE:LLOY) are two examples. The Lloyds share price is down 54% over the past year, with Barclays faring only slightly better, down 36%. Investing in these British stocks seemed a smart long-term play last year (I bought and still hold shares in Lloyds). But with the falling share price comes potential opportunity for value investors.
So if I had a lump of money to invest, and had to choose between the two British stocks, which would give me the best value and potential for long-term profits?
The case for Lloyds
Investors may want to choose Lloyds due to the focus on retail banking. The bank’s focus is primarily on UK retail clients, with UK small businesses being second. It’s Britain’s biggest retail and small business lender, showing both the reliance and the hold it has on those sectors. For 2020, this has been a drag on the share price. Consumer demand for general spending has been low, and the Covid-19 pandemic has hurt business lending.
For value investors, this negative can be seen as a positive. Should investors believe that the UK economy is at rock bottom, then this is the time to buy Lloyds over Barclays to benefit from a longer-term bounce back in both consumer and business banking.
Investors may also favour Lloyds as a top British stock to invest in due to the push towards digitisation. In the 2019 annual report, the group noted a 14% year-on-year increase in technology spending, now accounting for 19% of overall operating costs. This shows that the bank is focused on the future, with higher short-term costs likely to lead to longer-term revenue benefits.
The case for Barclays
Investors may want to buy Barclays stock instead, as a British stock with better value prospects than Lloyds. On Friday we get third-quarter results, so it’ll be interesting to see if there is any reduction in bad debt provisions from the second quarter. Credit impairment/bad loan provisions rose in the second quarter to £3.7bn. This reflects the large exposure the bank has to big corporates. Yet Barclays is less exposed to just the UK economy than Lloyds, which can be taken both ways.
On the one hand, provisions for Covid-19 will likely need to be larger for Barclays. Yet, the reduced exposure just to the UK could be a positive for the bank, given the handling of the virus versus other countries. For those who are sceptical about the success of Brexit (or risk of a No-Deal), then Barclays is likely less sensitive to this downside than Lloyds.
I do think the Barclays share price offers value to investors, sitting at levels not seen since 2009. Few would disagree that the bank is structurally sounder than it was during the financial crisis, so would be a buy when looking at it from that angle.
Which British stock to invest in?
Of the two, I’d favour Lloyds. The domestic exposure I feel is a positive, just edging it over Barclays. In terms of value though, both stocks offer this for long-term investors at current share price levels.
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jonathansmith1 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.