Which is the best of our FTSE 100 banks to invest in right now? I’ve chosen three to compare against each other, each with its own particular strengths and weaknesses.
Barclays (LSE: BARC) (NYSE: BCS.US) has the benefit of not having had to seek a taxpayer bailout, getting hold of new private capital from Middle East investors at the critical time. On the downside, it has attracted more than an average share of opprobrium for various underhand dealings and has been hit with some sizeable fines — and that uncertainty has knocked the share price down 18% over the past 12 months to 219p.
No crisis here
Then, focused on Hong Kong and the Chinese sphere and not so dependent on Western real estate, HSBC (LSE: HSBA) was resilient in the face of the credit crunch that brought the boom to an end. But what if Chinese overheating should start to cool? There are fears, but they’re easing a little — but the shares are still down 8% in a year to 643p.
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Finally, we have Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US), which was rendered a dead dog by the crisis and only survived through a government takeover. Lloyds seems firmly on the road to recovery, but it’s still early days and there’s still risk there. Earlier optimism that pushed the shares up 15% earlier this year has crumbled, and we’re looking at a 12-month drop of 2% to 73.7p.
Here’s a snapshot of three banks’ current fundamentals:
| Barclays | HSBC | Lloyds | |
|---|---|---|---|
| EPS growth 2013 | -56% | +14% | n/a |
| P/E 2013 | 16.3 | 13.2 | n/a |
| Dividend Yield 2013 | 2.4% | 4.4% | 0.0% |
| Dividend Cover 2013 | 2.51x | 1.75x | n/a |
| EPS growth 2014* |
+25% | +7% | n/a |
| P/E 2014 | 10.4 | 12.0 | 9.6 |
| Dividend Yield 2014 | 3.2% | 4.8% | 1.8% |
| Dividend Cover 2014 | 2.96x | 1.73x | 5.94x |
| EPS growth 2015* | +28% | +7% | +7% |
| P/E 2015 | 8.1 | 11.2 | 9.0 |
| Dividend Yield 2015 | 4.5% | 5.2% | 4.3% |
| Dividend Cover 2015 | 2.73x | 1.71x | 2.55x |
* forecast
On those figures, I reckon all three are actually looking pretty decent value.
Stability vs risky growth
HSBC is showing the consistency and resilience it is famed for, and I think it does deserve a higher forward P/E. But a P/E of around 12 perhaps doesn’t provide a sufficient buffer should we see an economic faltering in China. With the country’s 7.5% growth per year being close to the government’s target, I don’t think there will be a crash, but there could be some buffeting from gentler economic storms.
Barclays looks very cheap on those figures. But the revenge of Western governments for the ills wrought by irresponsible banking has not subsided, and many are fearing more and heftier penalties to come. Still, with such strong EPS growth expected and a P/E falling as low as 8.1 for 2015, I still think Barclays is undervalued.
Pipped at the post
But Lloyds gets my overall nod at the moment, by a whisker. It seems likely that the Prudential Regulation Authority will approve the bank’s application to restart dividends in the second half of 2014, and the prospects going forward from there are very attractive at current prices.
