It has been a deathly few years for investors in the big UK banks such as Barclays (LSE: BARC), HSBC Holdings (LSE: HSBA) and Lloyds Banking Group (LSE: LLOY).
All three stocks are down by 10% or more over the past 12 months. Barclays and HSBC are both negative over five years as well, although Lloyds has grown 40% as it pulled back from the abyss.
Like many investors, I’ve been scanning the sector for signs of life, and now I may have spotted some.
Barclays
Barclays’ troubles have given chief executive like Antony Jenkins a free hand to carry out drastic surgery, and he has saved £1.7bn by slicing 14,000 jobs and selling Barclays’ consumer banking businesses in Spain and the United Arab Emirates.
Jenkins has also steered Barclays through both European and British banking stress tests, while posting a steady increase in profits. Full-year pre-tax earnings are predicted to top £5.6bn when Barclays reports in early March.
Its share price is up 8% in the past week as sentiment improves, and a string of investment banks now have it as a ‘buy’, including Deutsche, Citigroup, Goldman Sachs and SocGen.
Barclays currently yields 2.67%, but that is forecast to hit 4.3% by the end of this year, and 5.4% by December 2016.
Its flatlining share price could now spring into life.
HSBC
It seems a long time since HSBC was known as the good bank, for avoiding the worst in the financial crisis.
Its high exposure to China was also once seen as a good thing, but with Chinese GDP growth falling to a 24-year low of 7.4%, that has turned bad as well.
But trading at 11 times earnings, these concerns are in the price. HSBC is also offering that rare thing in today’s banking sector, an attractive yield, of 4.8%. The shares have bounced 5% in the last week, as sentiment turns.
HSBC still has a long way to go, but the longest journey starts with a single step, as they say in China.
Lloyds Banking Group
The main focus at Lloyds Banking Group is the recovering UK. Although UK house price growth is slowing, the property shortage suggests there is little chance of an outright crash. Continuing low interest rates should also keep a lid on mortgage arrears and repossessions.
My worry is that given its Lloyds is particularly vulnerable to the rise of UK challenger banks such as Metro, M&S, Tesco, TSB and Virgin Money. If the Competition & Market Authority calls time on free banking, that may encourage more customers to shop around for a better current account, and Lloyds could lose business, or be forced to cut margins to keep it.
Of the three, the investment case for Lloyds looks weakest, especially as it still doesn’t pay a dividend.