Nearly six years after the financial crisis, banking stocks are still amongst the cheapest in the market.
In fact, Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US), Standard Chartered (LSE: STAN) and Barclays (LSE: BARC) (NYSE: BCS.US) are the three cheapest stocks in the FTSE 100, based on 2015 forecast earnings.
Does this mean you should be stuffing your portfolio with banking shares ahead of a recovery in sentiment — or is there a reason they’re still unloved and unwanted?
Let the numbers talk
To find out more, let’s take a look at three key valuation metrics for each bank, starting with the most widely used, the forecast price/earnings ratio:
|
Bank |
2014 forecast P/E |
2015 forecast P/E |
|
Lloyds Banking Group |
9.5 |
9.2 |
|
Standard Chartered |
8.7 |
8.9 |
|
Barclays |
12.0 |
9.4 |
The outlook for income is similarly attractive at all banks — even Lloyds, where City analysts are confidently predicting a return to dividend payments in the near future:
|
Bank |
2014 forecast yield |
2015 forecast yield |
|
Lloyds Banking Group |
1.6% |
3.9% |
|
Standard Chartered |
5.9% |
5.6% |
|
Barclays |
2.7% |
3.9% |
If City forecasts are even close to being correct, buying into these banking stocks now could give you access to an above-average, rising dividend income in a year’s time.
However, there are a few caveats: the latest consensus forecasts suggest Standard Chartered might cut its dividend slightly in 2015.
At the other end of the scale, Lloyds has not yet gained permission from the government to restart dividend payments. Although the latest consensus forecast for 2014 suggests Lloyds will declare a 1.2p final dividend, this is only educated guesswork, and is not certain.
Similarly, Barclays remains in the middle of its turnaround plan. Although the bank’s results should solid progress in 2014, there’s further to go — any setbacks could interfere with this year’s expected dividend growth.
Which bank should you buy?
In my view, there’s one further metric which provides a decent clue as to the best buys for medium-term returns.
Two of these three banks trade significantly below their tangible book value, suggesting that they could — in theory — be broken up and sold for more than their current share price:
|
Bank |
Price/Tangible Book value |
|
Lloyds Banking Group |
1.43 |
|
Standard Chartered |
0.86 |
|
Barclays |
0.87 |
Trading at 1.4 times tangible book value, Lloyds’ shares don’t look cheap.
However, both Standard Chartered and Barclays look very attractive, as unless they experience major new bad debts, the shares of both banks should eventually move closer to their book value.
Buying shares at a discount to tangible asset value is one of the oldest and most successful value investing techniques — and in my view both Barclays and Standard Chartered are strong buys.
