Which are better to buy now, Lloyds shares or Barclays shares?

I like Lloyds shares, but then I also like Barclays. In fact, I like lots of FTSE 100 shares. Oh, what a headache it all is!

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Should I buy more Lloyds Banking Group (LSE: LLOY) shares next, or should I branch out and buy Barclays (LSE: BARC) instead?

Here’s how forecast price-to-earnings (P/E) ratios and dividends yields look:

BankP/E 2023Dividend
2023
P/E 2024Dividend
2024
Barclays4.95.0%4.76.0%
Lloyds6.15.8%6.06.5%
Sources: Yahoo!, MarketScreener

Hmm, that doesn’t actually help me a lot. There are bigger dividend yields from Lloyds, but there’s a higher P/E to match.

Cheap shares

Both do look very cheap on this quick snapshot, though. And it does show just how much fear there must be over the banking sector as we near the end of 2023.

Does the lower P/E at Barclays mean investors are more bearish? I think it could, and I reckon that might be down to its US exposure. Some US banks do look a bit shaky now.

Comparing the share prices, below, shows the two have pretty much tracked each other, with Barclays a bit more volatile:

Domestic risk

Even though Lloyds doesn’t have the same international risk, it’s very much exposed to a risky sector right now.

It’s the UK’s biggest mortgage lender, and the property market is in a slump. So maybe that evens out the risks. Or, it might just be that investors see all banks as equally bad news right now.

I’m not sure how easy it is to compare the risks, but there’s one thing I’ll do. I’m going to keep my eye on provisions the two banks will make through the year, against possible losses from their respective business.

Whatever the source of the risk, it surely has to be quantifiable in terms of profits and provisions.

Dividend cover

Let’s get back to the dividends, though, and check another measure. I’m talking about cover by earnings, and I want to see earnings that are strong enough to pay out the cash with a good bit of safety margin.

Here’s last year’s dividend yields and cover, compared with forecasts for the current year:

BankHistoric
yield
Historic
cover
Forecast
yield
Forecast
cover
Barclays4.6%4.2x5.0%3.6x
Lloyds5.3%3.0x5.8%2.7x
(Sources: ShareCast, Yahoo!)

That probably swings things a bit in favour of Barclays, I think. It could lift its dividend yield to match Lloyds, and still have superior cover.

If Barclays paid the same 5.8% as Lloyds this year, for example, that would still imply better cover than Lloyds, at around 3.1 times.

Bank risk

One big take from these valuations is that I’d be unwise to ignore the risk to banks right now, and I’ve already touched on the main one.

Lloyds has already built up £662m in impairments in the first half. And over at Barclays, the figure stood at £896m. That’s a score to Lloyds.

Higher interest rates mean better lending margins for banks. But it looks like that benefit is more than offset by bad loan risks right now.

Which one?

I still rate both banks as good long-term buys, but which one? I think I might have to have some of both.

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.

Alan Oscroft has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Barclays Plc and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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