The UK banking sector has posted disappointing returns in recent months, with the impact of increased regulation causing investor sentiment to weaken. This is of little surprise, since more regulation inevitably means less risk taking and, although the bottom lines of the sector are healthier than they have been for many years, looking ahead it is likely that profits will be hurt to a degree by a more conservative regulatory regime.
However, that doesn’t mean that great returns aren’t on offer and, with the prospect of great value and growth, the likes of Barclays (LSE: BARC) (NYSE: BCS.US), RBS (LSE: RBS) and HSBC (LSE: HSBA) (NYSE: HSBC.US) could outperform the FTSE 100 this year.
Valuations
After a period of underperformance, HSBC and Barclays now offer even better value than ever. For example, having fallen by 5% and 12% respectively in the last year, they now trade on exceptionally low forward price to earnings (P/E) ratios.
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For example, Barclays has a forward P/E of just 9.4, while HSBC’s is also hugely appealing at just 10.5. Both of these ratios indicate that there is significant upside on offer for investors in both banks, with market sentiment likely to warm to such low valuations for such high quality banks – especially when you consider that the FTSE 100 has a P/E ratio of 15.7.
RBS, meanwhile, has seen its share price rise by 11% in the last year, but, even so, it also offers excellent value for money at the present time. For example, it has a forward P/E ratio of just 11.8 which, although higher than that of Barclays and HSBC, still indicates substantial upside is on offer versus the wider index.
Looking Ahead
Clearly, for RBS, Barclays and HSBC to see their share prices move higher, investor sentiment in the banking sector must improve. And, while more regulations are likely to cause a brake on profitability, the forecast levels of bottom line growth seem to be more than sufficient to justify increased ratings in the future.
In other words, the banks appear to have finally ‘come out the other side’ of the financial crisis and are now delivering strong profitability and growth that is at least in-line with that of the wider market.
Therefore, while further fines are possible and more allegations of wrongdoing could come to light, the banking sector seems to be a good place to invest. And, with RBS, Barclays and HSBC trading on such low relative valuations, they are all set to beat the FTSE 100 and have an excellent 2015.
