The banking sector should have a good 2014, as bank shares are generally correlated to the economies in which they operate. But each of the UK’s banks face different prospects and challenges. How do Barclays (LSE: BARC) (NYSE: BCS.US), Lloyds (LSE: LLOY) (NYSE: LYG.US) and RBS (LSE: RBS) compare?
Momentum
Lloyds has momentum. Its shares have risen 62% over the past twelve months, pushed by progress in its restructuring plan and the successful sale of government shares. Three factors should provide further momentum throughout 2014:
- A buoyant economy and booming housing market. Lloyds provides a fifth of all UK mortgages, demand for which is being stimulated by the government ahead of 2015’s general election.
- Progress on Lloyds’ transformation and the resumption of dividend payments.
- Further disposal of the government’s shares. A sale based on publication of Lloyds’ results in March would coincide with Vodafone shareholders reinvesting their cash receipts. A retail tranche is likely.
In the longer term, Lloyds’ dependence on UK retail and commercial banking limits its growth prospects, but with a 70% payout policy it could become a good income stock.
Downward cycle
RBS’s immediate future is less clear. Â It’s less far on with its transformation plan than Lloyds, so there should be plenty of upside for patient investors. And a healthy economy will accelerate the disposal of bad and non-core assets, including US subsidiary Citizens Bank. But the new CEO is cautious on timing.
The bank has acquired an accident-prone reputation: tussles with the government over strategy, losing its finance director after 10 weeks, allegations that it pushed businesses into administration, and a series of IT breakdowns that hint of fundamental systems issues.
RBS could surprise on the upside or the downside in 2014. But on a downward earnings-rating cycle, they’re not on my buy-list.
World class
Barclays has also had a difficult year. An unexpected imposition of a leverage ratio forced a deeply-discounted rights issue. That put back the transformation plan by a year and dilutes future earnings. Capital markets activity hasn’t grown as much as the general economy, so investment banking, which contributes around 40% of Barclay’s business, hasn’t fared as well as retail banks.
But Barclays’ investment bank is now world-class, and it has valuable businesses in Barclaycard and Africa which together make more money than its retail bank. 2014 won’t be a great year, but in the longer term Barclays has the biggest upside. And it pays a real dividend, something the other two banks can’t yet boast.