I’m making my pick from the five banks listed on the FTSE 100, which are Barclays PLC (LON:BARC), Royal Bank of Scotland Group plc (LON:RBS), Lloyds Banking Group PLC (LON:LLOY), HSBC Holdings plc (LON:HSBA), and Standard Chartered PLC (LON:STAN).
Here are some numbers:
| Company | HSBC | Lloyds | Barclays | RBS | Standard Chartered |
|---|---|---|---|---|---|
| Market cap | £139bn | £41.9bn | £40.4bn | £18.2bn | £38.3bn |
| Share price | 743p | 59p | 314p | 299p | 1,585p |
| Share price growth | +46% | +130% | +78% | +50% | +21% |
| Historic EPS growth | -20% | n/a | +24% | n/a | +14% |
| Forward EPS growth | +33% | n/a | +3% | +265% | +3% |
| Historic P/E | 13.3 | n/a | 7.6 | 51.5 | 10.6 |
| Forward P/E | 11.6 | 13.0 | 8.9 | 13.2 | 10.5 |
| Historic PBV | 1.3 | 0.9 | 0.7 | 0.3 | 1.4 |
| Historic Dividend | 4.6% | 0% | 2.5% | 0% | 3.5% |
| Forward Dividend | 4.4% | 0.2% | 2.3% | 0% | 3.8% |
| Forward Cover | 1.9x | 30x | 4.8x | n/a | 2.5x |
Share price growth is over the past 12 months, historic figures are for December 2012, forward figures are based on December 2013 forecasts.
Standard Chartered
I do quite like the look of Standard Chartered. It’s on a modest price-to-earnings (P/E) ratio, both historic and prospective, and pays a decent dividend. And perhaps more importantly, it does most of its business in Asia and escaped the worst of the Western banking crisis — and wasn’t involved in mis-selling or LIBOR-fixing scandals, or anything like that. But it’s for those reasons that Standard Chartered is not my choice — it’s hard to compare with the others, and I really want to look at U.K. high-street banks.
The bailouts
There’s really no disputing that the two bailed-out banks, Lloyds Banking Group PLC (LON:LLOY) and Royal Bank of Scotland Group plc (LON:RBS), are on the road to recovery — and they’ve already rewarded investors over the past couple of years, although Royal Bank of Scotland Group plc (LON:RBS) shares have slumped since the start of this year. But since the bailout, taxpayers are actually still sitting on losses with both banks.
One thing that makes these both unattractive to me, though, is how hard it is to value them at this stage in their turnaround. Both are trading at less than net asset value, with Royal Bank of Scotland Group plc (LON:RBS) on a price-to-book value of only 0.3, which suggests there’s value there — but we have P/E values that can’t really mean much at the turnaround point, and no dividends to speak of. We also have no idea what the government will do with our taxpayers’ stake, or when anything will happen, and I tend to steer away from companies whose valuations are so much at the whim of governments. So these two are also out for me.
Last two standing
For me it’s down to Barclays PLC (LON:BARC) or HSBC Holdings plc (LON:HSBA), and I do like the latter. But HSBC Holdings plc (LON:HSBA) looks reasonably fully valued to me — the shares are selling for around 1.3 times net asset value and P/E is a little below the FTSE’s long-term average, though there’s a decent dividend expected of 4.6%.
Barclays PLC (LON:BARC), on the other hand, currently looks undervalued on its forward P/E of just under 9 and with a PBV of only 0.7. There’s a dividend yield of a modest 2.3% expected this year. But it should be nearly five times covered, suggesting there’s plenty of scope for future increases — even if the bank has had to set aside more than 3 billion pounds to cover the mis-selling of payment protection insurance and interest rate hedging products.
Is Barclays cheap?
Of course, some will say that’s a good reason for Barclays PLC (LON:BARC) to be lowly valued. And it was, after all, also fined a total of 290 million pounds for its part in attempting to manipulate the interbank LIBOR rate. But I reckon a good time to buy a share is when sentiment is against it, and sentiment does seem to be against Barclays PLC (LON:BARC) despite some important changes.
Bob Diamond, head of the bank at the time of its shadiest days, has gone, as have two of the bank’s divisional bosses who were close to him, investment banking head Rich Ricci and wealth management head Tom Kalaris. New chief exectutive Antony Jenkins seems like the much-needed new broom.
For those reasons, Barclays PLC (LON:BARC) is my pick of the FTSE 100 banking sector.
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The article Why Barclays Beats Royal Bank of Scotland and Lloyds originally appeared on Fool.com and is written by Alan Oscroft.
Alan does not own any shares mentioned in this article. The Motley Fool owns shares in Standard Chartered. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
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