While the FTSE 100 has risen by over 4% since the turn of the year, sentiment in the banking sector has been somewhat mixed. In fact, the likes of Lloyds (LSE: LLOY) (NYSE: LYG.US), RBS (LSE: RBS) and Santander (LSE: BNC) (NYSE: SAN.US) have all underperformed the wider index since the turn of the year, even though their outlooks appear to be somewhat brighter as a result of the ECB’s commitment to a quantitative easing (QE) programme in Europe.
However, all three stocks could be excellent long-term performers and their recent price weakness could prove to be an opportune moment to buy a slice of them. Here’s why.
Lloyds
With the FTSE 100 trading on a price to earnings (P/E) ratio of 15.9, Lloyds’ current rating of 9.3 simply screams ‘value for money’. That’s because it is a whopping 42% lower than the wider index’s P/E ratio and means that Lloyds could see its share price boosted by a significant rerating over the medium term.
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The possible catalysts to effect this are the bank’s earnings growth figures and its dividend growth forecasts. For example, it is expected to increase its bottom line by 4% in the current year and by a further 5% next year, both of which are generally in line with the wider index’s growth rate. And, with Lloyds set to yield 5.6% in 2016, it would be of little surprise if investor sentiment picked up sharply, as higher yields become more in demand as a loose monetary policy looks set to remain in place.
RBS
Although the sale of the government’s stake in RBS has not yet commenced, its announcement seems likely over the medium term and could have a positive impact on its share price. This occurred with Lloyds when the government announced the sale of the first tranche, as it proved to investors that the bank was returning to full health.
Certainly, RBS has some way to go before this takes place, but its strategy of rationalising the business is really starting to take shape and is leaving a leaner, more efficient and, ultimately, more profitable business. And, with its return to profitability due to be announced shortly, it could prove to be a surprisingly strong performer throughout the rest of the year.
Santander
The recent decision by Santander to raise up to €7.5bn in a placing had a negative impact on its share price, with it being down 13% in the last three months. However, in the long run it could prove to be a very wise move, since it puts the bank on a much firmer financial footing that is likely to allow it to grow its top and bottom lines at a faster pace than it otherwise would have been able to.
As well as its long term potential, Santander also has a stunning yield at the present time, with its shares due to pay out 4.2% in dividends this year. This is a sizeable reduction from last year and puts the bank on an even firmer financial footing, with it now being expected to have a much healthier payout ratio of 47% in the current year.
So, with a combination of a high yield and sound finances, Santander could deliver an excellent total return in the long run, and now could be a good time to buy a slice of it.
