The last year has been disappointing for investors in Barclays (LSE: BARC) (NYSE: BARC.US) and Lloyds (LSE: LLOY) (NYSE: LYG.US), with the two banks seeing their share prices being flat and falling by 6% respectively. Both have underperformed the FTSE 100s performance of +2% but, as ever, the past is not an accurate guide to the future and so, looking ahead, which one will be the better performer?
Clearly, both stocks are very attractively priced. However, after a 2013 calendar year that saw its shares soar by 61%, Lloyds is the more richly valued of the two banks. Evidence of this can be seen in their price to book (P/B) ratios, with Lloyds having a P/B ratio of 1.37 and Barclays having a P/B ratio of just 0.66. As a result, Barclays appears to be hugely undervalued relative to its sector peer, with it being difficult to justify such a low rating now that its future prospects appear to be so bight.
Of course, a major reason for its bright future is the strategy that has been put in place by current CEO, Anthony Jenkins. Under him, Barclays is attempting to significantly reduce the riskiness of its activities and also pull out of operations that require too much capital for too little return. And, although progress has not perhaps been as fast as the market would like it to be, Barclays is certainly in a much stronger position now than it was a few years ago.
In fact, Lloyds has pursued a similar strategy in recent years and, while it is not yet back to full health, it also seems to be moving in the right direction. And, with the UK economy continuing to improve, both banks seem to have bright longer term futures.
However, where Lloyds is considerably further ahead than Barclays is with regard to its efficiency. For example, its cost:income ratio is among the lowest in the UK banking sector and is forecast to be as low as 45% by 2017. If met, this would be hugely impressive and show that Lloyds has got a real grip on its cost base and has streamlined its operating activities.
Barclays, meanwhile, reported a cost:income ratio of 67% in its first half of 2014. While not among the highest in the banking sector, it clearly has a long way to go before its work of making the business more efficient is complete. As a result, Lloyds appears to be the more efficient of the two banks.
Clearly, the UK and global economic recovery remains somewhat fragile especially while the Eurozones future is apparently hanging in the balance. Therefore, both banks could see their share prices come under pressure as a result of negative macroeconomic news flow.
However, Barclays appears to be the more volatile of the two banks, since it has a beta of 1.47 versus just 1.05 for Lloyds. This means that Barclays share price should (in theory) move by 1.47% for every 1% change in the value of the FTSE 100, which is considerably greater than the 1.05% that Lloyds share price is expected to move by.
Despite its higher beta and less appealing cost:income ratio, Barclays still appears to be the better buy of the two banks. Thats mainly because it is so much cheaper than Lloyds, but also because it has no government shareholder and so has less political risk, as well as having a superb track record of profitability, with it remaining profitable throughout the credit crunch, unlike Lloyds which made severe losses.
So, while both banks seem to be worth buying, Barclays appears to be the better buy at the present time. Of course, they’re not the only stocks that could be worth buying, which is why the analysts at The Motley Fool have written a free and without obligation guide called 5 Shares You Can Retire On.
The 5 companies in question offer a potent mix of stunning growth prospects and super-low valuations. As such, they could boost your portfolio returns and help to bring you a big step closer to retirement.
Click here to find out all about them – it’s completely free and without obligation to do so.
Get FREE Issues of The Motley Fool Collective
Get straightforward advice on whats really happening with the stock markets, direct to your inbox. Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio wealth.
By providing your email address, you consent to receiving further information on our goods and services and those of our business partners. To opt-out of receiving this information click here. All information provided is governed by our Privacy Statement.