Investors are still fearful of banks, but thats surely the best time to be investing, isnt it? After all, its no good buying shares just when everyone else wants them and prices are pushed sky-high, is it?
Granted, there are still some pretty big risks facing the sector, and Id steer clear from any banks with excessive exposure to China and that completely rules out HSBC Holdings and Standard Chartered. But theres one bank which I think best balances risks with growth prospects, and thats Barclays (LSE: BARC). Let me tell you why.
The return of growth
Its old news that Barclays didnt need a taxpayer bailout back when Lloyds Banking Group and Royal Bank of Scotland did, but its still important to remember that that meant private investors saw long term value in Barclays. Its taken time, but its looking like Barclays is back to sustainable growth once again.
After a few years of up-and-down earnings and a stationary dividend, forecasters are expecting to see EPS grow by a third this year and by a further 20% in 2016. That suggests a P/E multiple of around 11 for the coming December, on a 253p share price, dropping to only about 9 a year later. And I think thats just too low at this stage.
We have a resumption of dividend growth on the cards too, with a modest 3% rise forecast for this year, but followed by a massive 33% rise next year to take us to a yield of 3.6%. That yield is some way behind the 5.2% for Lloyds for the same year, but it would be much better covered and Lloyds doesnt have the same EPS growth forecasts.
A new boss
Im also encouraged by the lining up of Jes Staley for the vacant chief executives chair, after the ousting of Antony Jenkins. The thing is, Mr Staley is a very experienced investment banker. And though investment banking seems as attractive as the plague to a lot of people in these sober days when banks are reforming themselves into prudent high-street retail banks, investment banking can actually be very profitable.
Barclays has actually been cutting back on its investment banking business, but so has everyone else, and that leaves opportunities. If we see the moves to reestablish a UK/US axis (at the expense of business elsewhere in the world), as appears to be chairman John McFarlanes preference, we really could be looking at a new era of profitability for Barclays in the not-too-distant future.
Scaring the City
Now, bad behaviour like the fixing of Libor rates and the mis-selling of PPI still weighs heavily on Barclays, and the uncertainty surrounding such things is anathema to the institutional investors in the City. And that is, surely, holding the share price back. But with a possible time limit on PPI claims on the cards, and another new broom sweeping cleaner at the helm of Barclays, that uncertainty will recede.
Well need to wait to see if Jes Staley gets the required nod from the Bank of England and the Financial Conduct Authority, but considering his experience and the respect in which he is held, I would be astonished if it didnt happen.
On the whole, for the best prospects of combined growth and dividends, Barclays could well be the best banking bet right now its certainly one of the only two banks Id buy.
And getting back into quality banks now could even help you achieve millionaire status by the time you retire.
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Alan Oscroft owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Barclays and HSBC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.