The road to recovery for the big UK bankshas been long and bumpy since the financial crisis, and the journey isfar from over. 2015 has been another disappointing year for investors, but many will be emboldened by hopes of a better yearto come.
Bad Boy
This has been a troubled year for Barclays (LSE: BARC), especially the last six months, during which time the share price plungednearly 17%. Signs of slippage in its investment banking decision has disappointed markets, which are taking time to adjust to the new, leaner, meaner(or is it smaller, weaker?) Barclays.The 10% dip inadjusted profits before tax to 1,427m did little to help sentiment.
Barclays has a new chief executive from today, 1 December James E Staley and it willtake time tosee whether his strategy chimes with chairman John McFarlane, who wants Barclays to focuson its core strengths, notablyBarclays UK retail and business banking, Barclaycard and the African businesses. There are signs of brighter times ahead, with a forecast rise in earnings per share of 28% this year, and another 19% in 2016. Although that may largely come from cost-cutting and disposals, with forecast revenues barely shifting at around 25n a year. By the end of next year Barclays is forecast to yield a sluggish3.7%, as restoring the dividend takes longer than investors hoped. At 13 times earnings, it could be cheaper as well.
Better Boy
Recent share price performance at Lloyds Banking Group (LSE: LLOY) is spookilyidentical to Barclays, down 8% over 12 months and 17% over six. Perhaps both are now moving in lockstep with each other. They certainly face the same challenges, including shrugging off financial crisis hangovers such mis-selling and rate-rigging scandals, managing non-core disposals,and adjusting to their newstraitened circumstances.
Lloydsunderlying profits for the nine months rose 6% to 6.35bn, which looks good but again, like Barclays, revenues have been flat. They are forecast to rise only slightly next year from around 17.87bn this year to 18.21bn,hardly earth-shattering. A forecast dip in pre-tax profits should shrinkEPS, which are forecast to drop 6% in 2016.
How They Rate
Other numbers give grounds for optimism.The dividend isset to hit the fast track next year, juicing upthe yieldfrom todays 1% to 5.3% by the end of 2016, with suggestions that it could hit a lip-smacking 7% after that. Its solid13.7% of core tier one equity and a total capital ratio of 22.2% should help underpin the banksgenerosity to shareholders. Lloyds is also cheaper than Barclays, trading at just 9.1 times earnings.
Both these banks may get a lift if the US Federal Reserve finally hikes interest rates in December, which wouldallow them to boost their lending margins.The danger is that if rates rise faster than expected bad debt ratios couldshoot up as well. That is hard to imagine but the recent surge in M3 money supply suggests that 2016 could be more buoyantthan many of us expect.
After several moribund years Barclays and Lloyds are due a revival,but if I was only buying one my choice would be Lloyds.
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Harvey Jones 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.