Which Bank Is Now The Best Value: Lloyds Banking Group PLC, Royal Bank of Scotland Group PLC Or Barclays PLC?

G A Chester looks at the valuations of Lloyds Banking Group PLC (LON:LLOY), Royal Bank of Scotland Group PLC (LON:RBS) and Barclays PLC (LON:BARC) after their recent results.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Recent annual results from the banks are my cue to revisit the valuations of Lloyds (LSE: LLOY) (NYSE: LYG.US), Royal Bank of Scotland (LSE: RBS) and Barclays (LSE: BARC) (NYSE: BCS.US).

First off, how did the market react to the latest releases from these three banks? Well, Lloyds was the only one whose shares rose on the day of its results: up a modest 0.6% to 79p. Barclays’ shares fell 3.2% to 254p, while RBS suffered a 4.1% drop to 387p. (I’ll be using these share prices for the valuation measures in this article.)

The results showed all three banks continuing to post hefty exceptional costs for such things as past misconduct and business restructuring. On the positive side, all three also reported an improving picture on impairments, lower operating costs, and an increase in their capital buffer ratios.

Should you invest £1,000 in Barclays right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Barclays made the list?

See the 6 stocks

Despite the exceptional costs, Lloyds was able to post a statutory bottom-line profit for the first time since the financial crisis — £1.5bn. Barclays posted a profit of £0.8bn, but RBS booked a £2.7bn loss.

The table below, based on underlying profits — rather than the statutory numbers — shows the banks’ trailing and forward price-to-earnings (P/E) ratios.

  P/E 2014 Forecast P/E 2015
Lloyds 9.8 9.8
RBS 483.8 13.0
Barclays 14.7 12.3

Lloyds appears significantly better value than its rivals on the P/E valuation. The Black Horse is also forecast to pay a higher income. Having just declared a — symbolic, rather than substantial — dividend for the first time since 2008, Lloyds is expected to yield 5.3% for 2015, compared with 3.7% for Barclays and 0.5% for RBS.

However, Lloyds’ valuation is less attractive on another important measure: price-to-tangible net asset value (P/TNAV).

The table below shows the banks’ TNAV per share over the last five quarters.

  31 Dec 2013 31 Mar 2014 30 Jun 2014 30 Sep 2014 31 Dec 2014
Lloyds 48.5p 50.7p 49.4p 51.8p 54.9p
RBS 363p 376p 376p 388p 387p
Barclays 283p 284p 279p 287p 285p

All three companies have increased their TNAV per share from December 2013 to December 2014: Lloyds (+13%), RBS (+7%) and Barclays (+1%). The TNAV performances aren’t mirrored particularly well by the banks’ share price movements between last year’s annual results and this year’s: Lloyds (-3%), RBS (+18%) and Barclays (-4%).

At last year’s results date, Lloyds’ shares were on a P/TNAV of 1.67. Due to the decent rise in TNAV and modest decline in the share price, the P/TNAV has now come down to 1.44. So, Lloyds is cheaper now than it was a year ago.

The same goes for Barclays (to a less marked extent), with a P/TNAV of 0.89 compared with 0.94 a year ago. But, RBS, whose share price has risen well ahead of the increase in TNAV, is now more expensive — on a P/TNAV of 1.00 compared with 0.90 last year.

Despite Lloyds’ P/TNAV having come down from a year ago, though, the Black Horse remains distinctly more expensive than its rivals on this measure.

So, which bank is the best value now?

RBS’s valuation looks to be — on the face of it — up with events. The bank remains majority-owned by the government, and is behind Lloyds in the healing process. I think we need greater visibility on RBS’s future for the shares to re-rate higher.

For investors looking for a high income, Lloyds’ potential dividend yield catches the eye. The P/E is also low, but I think a re-rating of the shares is likely to be limited for the time being by the relatively high P/TNAV and the ongoing sale of the government’s remaining 24% stake in the bank.

For investors who like plays on undervalued assets, Barclays’ P/TNAV of 0.89 looks potentially attractive. For example, the company’s shares would be trading at 410p (about 60% upside) if they were rated on the same P/TNAV as Lloyds. However, Barclays’ P/E and yield suggest a more modest undervaluation, so, while there is scope for the shares to re-rate higher, I don’t think a 60% rise is on the cards in the short term.

But there are other promising opportunities in the stock market right now. In fact, here are:

5 stocks for trying to build wealth after 50

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

With average 10% yields, these mid-cap FTSE shares could supercharge a passive income portfolio

Some of the best passive income gems can be found on the UK's smaller indexes like the FTSE 250 and…

Read more »

A coin being dropped into a piggy bank
Investing Articles

As the Barclays share price tanks 19% in 2 days, is this a great buying opportunity?

As a trade war sends the Barclays share price into a tailspin, Andrew Mackie steps back to look at the…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Is Fundsmith Equity still a good choice for a Stocks and Shares ISA in 2025?

Many Britons hold the Fundsmith Equity fund in their Stocks and Shares ISAs. Is this still a good move? Edward…

Read more »

Investing Articles

Nvidia stock is down 24% this year. Time to buy the dip?

Christopher Ruane has been eyeing Nvidia stock as a potential addition to his portfolio for a while. Is a recent…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Down 25% since January, this resilient dividend stock’s catching my eye

Maintaining the UK’s rail, water, and energy infrastructure isn’t the most exciting business. But it has made this a solid…

Read more »

Investing Articles

Prediction: Unilever to outperform the FTSE 100 over the next 12 months

The FTSE 100 has made a strong start to 2025, but Stephen Wright thinks a popular dividend stock could be…

Read more »

Investing Articles

I just bought this legendary S&P 500 tech stock for my ISA, 27% off its highs

This S&P 500 stock has tanked over the last month and Edward Sheldon has snapped it up for his portfolio…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 beaten-down stocks to consider for an ISA after the massive market sell-off!

The stock market has had a sudden meltdown! Yet our writer thinks these two growth stocks look attractive candidates for…

Read more »