Theres been lots of talk about the upside potential ofLloyds (LSE: LLOY), Barclays(LON: BARC) and Royal Bank Of Scotland (LSE: RBS) since the Federal Reserve decided to hold interest rates last week dovish monetary policies in the West spurred by persistent emerging market risk could mean that it might not be time to buy bank shares as yet.Other factors suggest caution, too.
However, I can see certain arguments for buying right now
One-Off Charges
Id be prepared to invest in Lloyds at 55p a share which means that in order to record a 50% pre-tax capital gain, Id have to bet on a rise to 82.5p. Sadly, its stock is now priced at 72p, so I have to consider the possibility of a rally to 108p. I am not interested in trailing trends for stock prices, so I wouldnt pay much attention to the fact that Lloyds stock last traded above 100p ages ago after the collapse of Lehman Brothers Lloyds has become a leaner bank, and is a bet on the UK economy. Based on its core trading multiples and capital ratios, its stock is fairly priced yet it is 10% to 20% more expensive than it should be based on:
- the level of provisions that Id expect in future; and
- my estimatesfor interest rates into 2020.
So, Id wait before pulling the trigger until the stock was at least 20p cheaper if I were to target a 50% medium-term return on my LLOY investment.
One-Off Charges & Management Risk
The shares of Barclays carry more risk that those of Lloyds based on the level of provisions that I expect in future quarters and given a rather diverse assets base. But this is a bank that could really reward your patience if its management team took the decision to get rid of certain assets investment banking springs to mind!
Investment banking brings hefty returns but also absorbs huge amounts of capital, which dilutes returns. Costs must go down at a faster pace, too, and this is a stated goal for management. So, Barclays would accomplish bothobjectives if a more aggressive corporate strategy was properly implemented, and then there would be the chance that its stock currently priced at 246p would rally to 300p.
Yet a 50% rise to 369p is out of question for some time, in my view. Another problem is that Barclays may not appoint a new boss until next year.My personal price target remains unchanged: 220p a share.
Stress
If you are disappointed by the performance of Lloyds and Barclays, its because you are not in invested in RBS by far the worst performer this year (-20%). Only a few months ago, its managers hinted atshareholder-friendly activity, but that was clearly a wrong step in terms of managing expectations.The problem is the speed at which its restructuring is being implemented and the poor timing associated to the divestment of a significant stake in the bank by the government, which still owns a 73% stake in RBS.
In my view, RBS isnt ready to go solo without the help of the Treasury but if it does, it will have to show greater discipline and commitment to higher returns, while hoping that provisions will dropover time. If I were to bet on a 50% rise in its valuation from 311p to 466p, I wouldnt feel very safe but I may have a higher chance to be right than with Barclays and Lloyds.
Yet thats just upside potentialrather than realised capital gains.
And that’s why if you are serious about investing your savings wisely,youshould look for bargains further down the value spectrum, taking into considerationcertain smaller companies operating outside the banking industry. Read our FREE reports, which also explains how wealth can be created in 10simple steps!
Our research comes without obligations for a limited amount of time,and also includes severalcompaniesthatcould reward savvyinvestors over the long term. Download your free copy now!
Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.