Will Barclays PLC And Royal Bank of Scotland Group plc Ever Recover To 2015 Highs?

Can Barclays PLC (LON: BARC) and Royal Bank of Scotland Group plc (LON: RBS) be trusted?

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Shares in Barclays (LSE: BARC) and Royal Bank of Scotland (LSE: RBS) have consistently underperformed the wider FTSE 100 since the financial crisis. And these banks have also consistently under-delivered. Management teams have promised nearly every year that a recovery is just around the corner, but so far, any sort of recovery has failed to emerge.

So what’s next for these two banking giants, can investors ever trust them again and will their shares recover the losses of the past year anytime soon?

A stream of bad news 

An almost consistent stream of bad news has weighed on the shares of Barclays and Royal Bank of Scotland since the end of May last year. 

Indeed, over the past two months, shares in RBS have lost more than a third of their value while shares in Barclays have lost 37%. This was the worst performance for these banks since the European debt crisis in 2011.

RBS and Barclays are now facing so many headwinds, it’s going to be difficult for the two banks to stage a rapid recovery without completely transforming their operations. RBS is still offloading the toxic assets built up during the run-up to the financial crisis, a process that’s slowing down the group’s overall recovery. Moreover, the bank is trying to grapple with a deteriorating investment banking landscape. Similarly, Barclays is struggling with the deteriorating profitability of its investment banking arm, which used to be one of the group’s most profitable divisions.

But the biggest headwind that’s facing these two banks is that of negative interest rates. Concerns about slowing global economic growth have sparked concerns that central banks around the world will follow the European Central Bank and the Bank of Japan by introducing negative interest rates for banks. Just as rising interest rates are good for banks, falling interest rates are bad as it squeezes the amount of income they can earn by lending to borrowers. Additionally, negative rates punish banks for having excess levels of capital.

If lower interest rates do come to the UK, RBS and Barclays will suddenly be facing an even larger mountain to climb.

Over-priced 

Barclays and RBS may look attractive to investors due to their low valuations. For example, Barclays is trading at a forward P/E of 10.1 and RBS is trading at a forward P/E of 12.4, compared to the FTSE 100 average P/E of 25.5. However, compared to their larger banking peers, RBS and Barclays both look expensive — even after recent declines. Specifically, Lloyds trades at a forward P/E of 9 and HSBC trades at a forward P/E of 9.9. 

All in all, it looks as if shares in RBS and Barclays will struggle to recover to 2015 levels unless trading improves or there’s a sudden change in investor sentiment for the better. 

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.

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