Lloyds (LSE: LLOY) (NYSE: LYG.US) and Barclays (LSE: BARC) (NYSE: BCS.US) have both seen their share prices decline to near 52-week lows this year. For some investors, this could seem like a great opportunity to buy in and take advantage of their low valuations.
But is it really time to buy, have Lloyds and Barclays bottomed out, or will their shares fall further?
Improving outlook
There’s no denying that the outlook for Lloyds and Barclays seems to be improving. Both banks are recovering well from their past mistakes.
Indeed, the two banks have recently released impressive sets of half-year results, which showed a strong performance all round.
For example, Lloyds reported a 32% year on year rise in underlying profits to £3.8bn, impairment costs fell 58% and the bank’s capital ratio reached and surpassed management’s target of 11%.
Barclays’ results, also impressed, despite the bank’s troubles with regulators. In particular, during the first half of the year Barclays’ pre-tax profits fell 10% to £3.8bn, mainly due to falling income at the company’s investment banking division. During the period profits at the investment bank fell 46% to £1.1bn.
However, Barclays’ core business, personal and corporate banking reported a jump in profit of 23% to £1.5bn. Additionally, costs fell 4.4% and impairment charges fell 13% during the period. And then there’s Barclays’ world-leading credit card business, Barclaycard, which reported a 8% jump in profits during the first six months of the year thanks to a higher volume of transactions.
But is it time to buy?
Is it time to take the plunge and invest in Barclays and Lloyds? Well, the two banks do now look to be attractively priced, which implies there is a margin of safety for investors.
Specifically, Barclays is currently trading at a 2015 P/E of 8.2, while Lloyds is trading at a similar forward P/E of 8.9. What’s more, current City forecasts expect Barclays to support a dividend yield of 4.5% next year. Analysts expect Lloyds’ shares to support a yield of 4.3% next year, if the bank is allowed to restart dividend payments.
Still, although these valuations may appear attractive, risks remain. Barclays is facing several lawsuits regarding its dark pool and stands accused of assisting hedge funds in avoiding U.S. taxes. If U.S. regulators decide to dig their teeth in, these accusations could cost the bank billions.
Lloyds, too, is facing ongoing legal and mis-selling issues. Nevertheless, Lloyds’ drive to create a simpler bank over the past few years has reduced its exposure to shady regions of the industry, where Barclays is finding itself falling foul of regulators.
Working it all out
Overall, after recent declines both Lloyds and Barclays look attractive but the two banks still have many risks ahead. I strongly suggest you research the banking sector further before making any trading decision.
