Ive thought for some time that our top listed banks are undervalued right now, with share prices very likely still depressed by ongoing fears from the financial meltdown. I do think there are strong reasons to avoidbothHSBC Holdings and Standard Chartered.And Royal Bank of Scotland still looks overpriced for its relatively slow recovery, but the remaining big three look good to me.
Set for a comeback
Ill start with the most unusual first, Spain-based Banco Santander (LSE: BNC). Santander is going through a transformation to what would be considered a normal dividend regime by most Western observers. In the past, the bank has been paying very high dividend yields that were not covered by earnings, but it managed to do that because a large number of Spanish investors would take scrip instead of cash although that, of course, dilutes future earnings.
Today, Santander is on an expected dividend yield for the year just ending of 3.9%, forecast to rise to 4.3% in 2016. That would give us P/E multiples of around 9.5 this year, dropping to 9 next. With earnings set to grow modestly after two years of very strong growth, that makes the shares look attractive to me after falling 38% this year, to 336p, Santander could be set for a comeback.
Barclays (LSE: BARC) shares have lost 8.5% this year, dropping to 220p, though theyve picked up a little since their mid-December low. That leaves them on a P/E of just over 10 this year, dropping to 8.5 in 2016, as EPS is expected to show two years of gains above 20%.
Ive always considered Barclays to be perhaps the UKs strongest bank it escaped a bailout during the crisis by attracting private capital, and has since been comfortably able to pass the Bank of Englands stress tests.
I have Barclays shares in the Fools Beginners Portfolio (though that is not real money), and although they havent done much so far, I can easily see 2016 as being a transformational year for Barclays I recently opined that there could be an upside of as much as 65% in the relatively short term.
Barclays dividend yields are still modest at an expected 2.9% this year, followed by 3.6% next, but theyre strongly progressive.
Best of the lot?
Then I come to my own favourite, Lloyds Banking Group (LSE: LLOY), which is the one Ive chosen for some of my own money. Lloyds shares have dipped by 2.4% in the year so far (with just a few hours left), to 73p. Its true that EPS forecasts for this year and next arent fantastic a 3% lift this year followed by an 8% fall but the killer for Lloyds is its dividend.
Lloyds obtained approval to resume handing out cash in the second half of 2014 with a very modest 0.75p per share, which was well ahead of bailed-out rival RBS. Now were on for a yield of around 3.3% this year, rising to a twice-covered 5.1% next year. P/E multiples come in at under nine, rising only as far as 9.5 in 2016, and I reckon thats way too low.
The overhang caused by the governments stake in Lloyds that is being steadily sold off probably accounts for the depressed share price, but once thats gone I can see an uprating on the cards.
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Alan Oscroft owns shares in Lloyds. 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.