The banks had a tough time in 2014, and share prices that had been recovering nicely took a turn back down again. But 2015 could be a good year for the sector, so which bank is likely to do best?
I reckon itll be between Barclays (LSE: BARC) (NYSE: BCS.US) and Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US).
Barclays shares are down 21% over the past 12 months to 232p while Lloyds has lost 12.5% over the same period to 73.5p, even though both banks passed the latest Bank of England stress tests (although Lloyds only just made it), both have earnings growth forecast for the next few years, and both are on very low P/E ratings compared to the FTSE 100 average.
Barclays, of course, didnt need a taxpayer bailout after it secured sufficient new private capital to keep it going, while Lloyds did need a rescue deal. And though Barclays managed a quicker return to health, Lloyds hasnt been too far behind. Barclays has carried on paying dividends, but Lloyds should be back to handing out the annual cash soon in fact, were still waiting to hear if it can pay a final dividend for 2014.
Which is best?
So which will win in 2015? It seems to me its largely a question of valuation vs risk.
On the valuation front, Barclays looks the better bet right now. Theres a 20% rise in earnings per share (EPS) expected for the year just ended, and then double-digit rises forecast for the next two years. The 2014 dividend is expected to be around 3%, but the City is predicting stronger cash for the next two years with yields of 4% and 5%.
If those prognostications turn out right, well be looking at P/E multiples of under 9 for 2015 and dropping to 7.5 in 2016 on the current share price.
At Lloyds meanwhile, theres a return to positive EPS on the cards for 2014 followed by modest rises of 4% and 5% for the next two years. If dividends do return for the year just ended, we should see around 1.4% rising to 3.8% for 2015. The pundits suggest 5.8% in 2016, but that would only be around twice-covered by earnings and is looking a bit stretching to me.
With a ratio of around 9.5 now, wed see the P/E drop to 8.6 on 2016 forecasts.
More fines?
Set against that we have fears of further regulatory penalties for past misbehaviour, and Barclays has been pretty naughty in that regard and perhaps it deserves a lower rating that Lloyds because of that.
On the whole I think most people would expect Lloyds to recover more strongly this year, but my money would be on Barclays with its lower P/E, stronger EPS forecasts and better dividends.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
