2 FTSE 100 financial stocks that I think could perform better than expected

Many UK financial stocks are currently trading at attractive dividend yields due to the political uncertainty in the country. Today, I want to look at two FTSE 100 stocks in particular that I think can deliver good returns for income investors — Lloyds (LSE: LLOY) and Aviva (LSE: AV).  

Lloyds

Shares of the UK’s largest retail bank have oscillated somewhat over the course of the last year, but right now they are trading around 5,400p a share, which is near the middle of their yearly range. Shareholders had to endure a painful August as the stock lost 7% of its value over the course of the month. However, at the time of writing, the shares seem to have recovered.

What has been the main factor behind the market’s uncertainty about this venerable banking giant? In a word, Brexit. Specifically, the threat of a no-deal scenario represents a serious threat to all banks, not just Lloyds. It has done a good job of refocusing itself on domestic retail banking. The problem with this pivot is that it makes it more reliant on the UK economy, and in particular on consumer sentiment. Mortgage lending also represents an important source of revenue for the bank, so a slowdown in the property market as a consequence of a no-deal Brexit could also adverse impact the share price. 

With all that being said, I do think that shares of Lloyds represent a good opportunity for income investors. Currently, they have a dividend yield of 6%, which outstrips the FTSE 100 average of 4.5%. Moreover, as I have argued previously, I think that while Brexit certainly poses a problem to UK banks in the short term, in the grand scheme of things, larger banks like Lloyds are probably better-positioned to deal with the fallout than some of the smaller banks that have emerged in recent years to nip at the heels of established players. 

Aviva

Shareholders of insurance company Aviva went through a similar experience in the month of August as the one described above, with the stock falling 11% as the market confronted the possibility of a no-deal Brexit. Just like Lloyds, these losses have been largely recovered in September. However, unlike Lloyds, Aviva has many interests and businesses in the EU, including in France, the Netherlands and Poland. This makes it somewhat more insulated against a potential Brexit shock.

As noted by my colleague Manika Premsingh, Aviva is priced at a significant discount to its peers in the insurance industry — Prudential carries a price-to-earnings ratio of 21.7, compared with just 6.7 for Aviva. Legal & General carries a P/E of 8.14. 

Overall, I expect both Lloyds and Aviva to do better than the market seems to expect. However, given its slightly higher dividend yield, attractive valuation relative to its peers and geographical diversification, I give Aviva a slight edge.