So, the Dow closed at over 17,000 points for the first time in its history in the run-up to Independence Day. Indeed, both the Dow and the S&P 500 are trading at record levels, while our own FTSE 100 continues to trade timidly below its record highs from around fourteen years ago.
However, 7,000 points is tantalisingly close and one key reason for the FTSE 100 being unable to push past that level is a rather muted performance from some of our major banks. Indeed, Lloyds (LSE: LLOY) (NYSE: LYG.US), HSBC (LSE: HSBA) (NYSE: HSBC.US) and Barclays (LSE: BARC) are among the ten biggest UK shares and, as such, have a big impact on the FTSE 100’s level. With things starting to pick up and improve for them, they could turn out to be the major catalysts for a FTSE 100 record-breaking run.
Continuous Improvement
One key difference between the US and the UK right now is the strength of the banking sector. While UK banks are generally ahead of their European counterparts in terms of financial strength and capitalisation, their performance still lags that of US banks. That’s at least partly because of a policy to throw even more money at the banks than the UK has done (via quantitative easing) and, as such, US banks are reporting strong earnings numbers while major UK banks such as Lloyds are only just returning to profitability this year.
However, UK banks are set to enjoy a purple patch of earnings growth over the next couple of years. For example, Lloyds is forecast to grow earnings per share (EPS) by 10% in 2015 after returning to profitability this year, while HSBC is expected to see improvements in its bottom line of 9% in 2014 and in 2015. Meanwhile, Barclays (profitable throughout the last five years) is forecast to increase EPS by a staggering 43% this year and 23% next year.
Looking Ahead
If the banks deliver on their strong growth prospects, the sector could look a lot more attractive than it does at the moment. This could entice investors who have thus far been wary and highly sceptical of the banks to demand shares in them. There’s certainly great value on offer. For example, Lloyds trades on a price to book ratio of just 1.4, while HSBC and Barclays trade on a ratios of just 0.6. There seems to be vast potential for price increases among the three biggest UK banks which, when combined with strong growth prospects, could help to push the timid FTSE 100 to record-breaking highs.
