Next week might be exciting for long-suffering UK bank shareholders. The UK’s Big Five banks — including Lloyds Banking Group (LSE: LLOY) and Barclays (LSE: BARC) — all report first-quarter earnings. HSBC Holdings leads on Tuesday, with Barclays and NatWest Group finishing on Friday. With US banks reporting bumper profits for Q1, I’m monitoring the Barclays share price and the Lloyds share price to see which offers the better bargain. Here’s what I think.
The Lloyds share price and Barclays share price slip
At its 52-week peak, the Lloyds share price closed at 45.02p on 13 April 2021. Now it stands at 42.62p, dipping 2.4p (5.3%) in a week. Likewise, Barclays shares peaked at 190.34p on 30 March 2021. They have since slid to 183.78p, losing 6.56p (3.4%). Maybe these shares will get an uplift when banks unveil their figures next week? After all, the banking regulator has allowed British banks to resume paying dividends. Also, three of the Big Five are buying back their shares, boosting future returns for shareholders who sit tight. This could provide support for Barclays shares and the Lloyds share price. Already, the FTSE 350 Banks index is the third-best performer of 40 FTSE 350 sectors in 2021, rising 15.5% this calendar year.
Lower loan losses would be good for banks
Across the Atlantic, the Big Four US banks made blow-out profits as financial markets boomed. They also boosted their bottom lines by reversing much of last year’s loan-loss reserves. With UK banks beefing up bad-debt provisions in 2020, some of these billions could flow back, pushing up profits. Again, this could boost the Lloyds share price and Barclays shares. Similarly, if demand for credit picked up in Q1/21 and loan growth resumed, this would be a relief for banks. But if credit keeps shrinking, or loan losses rise, that spells bad news.
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British banks are also keen to arrest shrinking net interest margins (NIMs). The NIM is the margin/spread between lending rates and savings rates. In 2020, Barclays UK’s NIM was 2.61%, the best of the Big Five, while Lloyds’ NIM was 2.52% (placing second). If these two banks can sustain or improve their NIMs, then this might underpin the Lloyds share price and Barclays stock. But if NIMs keep falling, that’s another body blow.
Best stocks to buy now: Barclays or Lloyds?
As a value investor, I use company fundamentals to guide my buying decisions. Thus, when weighing up the Lloyds share price, I compare it to peers and the wider market. Here’s how Barclays and Lloyds stack up, head to head.
| 2021E | Q4 2020 | 2021E | 2021E | |
| P/E | P/B | Dividend Yield | Dividend Cover | |
| Lloyds | 10.8 | 0.83 | 4.0% | 2.29 |
| Barclays | 11.0 | 0.69 | 2.9% | 3.09 |
Source: A J Bell
Based on price-to-earnings (P/E) ratio, the Lloyds share price is slightly cheaper than Barclays. Also, Lloyds has a higher dividend yield (4.0%/year v 2.9%), but the Barclays pay-out is better covered by earnings. In terms of price-to-book (P/B) ratios, Barclays offers greater ‘bank for my buck’ (0.69 at Barclays v 0.83).
As a value hunter, Lloyds appears to be better bet for me. But Barclays, unlike Lloyds, is still big in investment banking. And this sector boomed in Q1/21 for US banks. So Barclays might enjoy an extra boost from higher investment banking revenues. That’s why I’m sitting on the fence. Today, I’d happily buy both the Lloyds share price and Barclays shares!
