Banking stocks have endured a rocky couple of years as we’ve come out of the pandemic. On the one hand, the banks have dealt with high inflation, causing a squeeze on retail clients’ spending activity.
Yet higher interest rates have boosted net interest income. When I consider two of the major UK banks, namely Barclays (LSE:BARC) and Lloyds (LSE:LLOY), which has the best trajectory for the long term? Are Lloyds shares my best bet, or Barclays?
How we currently stand
The reason why this is a good comparison is because both companies have a similar market-cap. At the moment, Barclays has a cap of £22.94bn. For Lloyds, this figure is £26.32bn. So they’re roughly the same size, as well as serving broadly the same type of clients.
Further, over the past year, both stocks have experienced similar movements. Lloyds shares are down 8%, with Barclays down 11%.
The move lower in both shares means I feel both are undervalued purchases at the moment. The price-to-earnings ratio is a good valuation tool to get a snapshot. Anything below 10 (in my opinion) shows a stock is potentially undervalued. Both Lloyds (5.63) and Barclays (4.84) currently fit this category.
So if I had to pick a bank stock to buy and hold for just a few months, I don’t think there’s much difference.
Looking to the long term
But the picture changes somewhat when I’m thinking about 2030. This is because the companies have differing aims in the coming years.
Barclays is pushing hard in the Corporate & Investment banking space. In fact, Q1 2023 revenue from this segment was the second highest on record. Revenue from mergers and acquisitions, along with advisory work on IPO’s is very lucrative.
Once the economy starts to boom again in coming years, this activity should only pick up. This contrasts with Lloyds, which doesn’t have a big footprint in this space at all.
Lloyds is very much focused on becoming more digital. Last year, it was announced the bank would spend £1bn in a three-year strategy to enhance digital banking capabilities. The benefits of this should be felt in the run up to 2030. It should help to retain and win clients, as well as making the bank more secure.
And the winner is…
Even though Lloyds is more concentrated on servicing the UK retail space, I believe the digital push will pay off. I think by maintaining focus on this main area could allow the bank to grow revenue and limit risk.
Barclays is more diversified in operations around the world, but I struggle to see how it can really be the best in any area, given the high competition. I feel this limits the growth potential.
To be clear, I think that both stocks are good long-term buys. Yet if I was forced to make a 2030 pick, I’d expect Lloyds’ market-cap to be worth more than Barclays.
