Is Barclays PLC Or Lloyds Banking Group PLC The Bank To Buy For 2016?

The road to recovery for the big UK banks has been long and bumpy since the financial crisis, and the journey is far from over. 2015 has been another disappointing year for investors, but many will be emboldened by hopes of a better year to come.

Bad Boy

This has been a troubled year for Barclays (LSE: BARC), especially the last six months, during which time the share price plunged nearly 17%. Signs of slippage in its investment banking decision has disappointed markets, which are taking time to adjust to the new, leaner, meaner (or is it smaller, weaker?) Barclays. The 10% dip in adjusted profits before tax to £1,427m did little to help sentiment.

Barclays has a new chief executive from today, 1 December — James E Staley — and it will take time to see whether his strategy chimes with chairman John McFarlane, who wants Barclays to focus on its core strengths, notably Barclays UK retail and business banking, Barclaycard and the African businesses. There are signs of brighter times ahead, with a forecast rise in earnings per share of 28% this year, and another 19% in 2016. Although that may largely come from cost-cutting and disposals, with forecast revenues barely shifting at around £25n a year. By the end of next year Barclays is forecast to yield a sluggish 3.7%, as restoring the dividend takes longer than investors hoped. At 13 times earnings, it could be cheaper as well.

Better Boy

Recent share price performance at Lloyds Banking Group (LSE: LLOY) is spookily identical to Barclays, down 8% over 12 months and 17% over six. Perhaps both are now moving in lockstep with each other. They certainly face the same challenges, including shrugging off financial crisis hangovers such mis-selling and rate-rigging scandals, managing non-core disposals, and adjusting to their new straitened circumstances.

Lloyds’ underlying profits for the nine months rose 6% to £6.35bn, which looks good but again, like Barclays, revenues have been flat. They are forecast to rise only slightly next year from around £17.87bn this year to £18.21bn, hardly earth-shattering. A forecast dip in pre-tax profits should shrink EPS, which are forecast to drop 6% in 2016. 

How They Rate

Other numbers give grounds for optimism. The dividend is set to hit the fast track next year, juicing up the yield from today’s 1% to 5.3% by the end of 2016, with suggestions that it could hit a lip-smacking 7% after that. Its solid 13.7% of core tier one equity and a total capital ratio of 22.2% should help underpin the bank’s generosity to shareholders. Lloyds is also cheaper than Barclays, trading at just 9.1 times earnings.

Both these banks may get a lift if the US Federal Reserve finally hikes interest rates in December, which would allow them to boost their lending margins. The danger is that if rates rise faster than expected bad debt ratios could shoot up as well. That is hard to imagine but the recent surge in M3 money supply suggests that 2016 could be more buoyant than many of us expect.

After several moribund years Barclays and Lloyds are due a revival, but if I was only buying one my choice would be Lloyds.