Lloyds share price is lagging far behind Barclays! Which bank is the better buy?
Bank against Bank
As a customer, I have long been a fan of Barclays, but I wouldn’t say my trust is unwavering. There are times when the bank really tests my patience. I’m not so familiar with Lloyds, but it’s still an attractive stock.
So if I hadn’t already invested in both, which would be the best choice today?
Let’s compare their financial data.
Lloyds
As the mortgage market becomes more competitive, Lloyds is under pressure. As the bank’s biggest cash generator, it needs to be at the forefront. And with the Bank of England (BoE) reversing its rate cuts last month, the situation has become even more difficult.
The cuts mean Lloyds’ net interest margins fell from 3.18% to 2.94% (the difference between the interest paid and the interest charged). Essentially, the company now earns slightly less on loans.
In addition, the results for the first half of 2024 were not spectacular. Net profit fell by 9% and operating costs rose, leading to a 14% decline in profit before tax.
Nevertheless, the bank’s low share price seems to offer good value for money. The bank’s price-earnings ratio (P/E) is attractive at 8.9. Based on estimates of future cash flow, the stock is 53 percent below its fair value.
And last but not least, its most important value proposition: an above-average dividend yield of 5.1%.
How does Barclays compare?
Barclays
Barclays’ share price benefited this week from news that the U.S. could avoid a recession, rising 3.4 percent on Thursday while other banks closed down about 1.5 percent.
That brings annual gains to a massive 46%, and I wonder how much more growth is possible. Surprisingly, the stock has yet to beat its earnings, with a P/E ratio of just 6.3, well below Lloyds and the UK bank average of 7.3.
Several important announcements this month have helped the company. The company increased its dividend by 7.4% and launched a $750 million share buyback program. The company also expects to complete the acquisition of Tesco Bank until November this year.
My biggest concern with Barclay is that the current share price may be artificially inflated. The last two years have been economic chaos and high interest rates have distorted several metrics. Further rate cuts could tip the scales and potentially cause shareholders to rethink their positions.
Even after 16 years, the 2008 crisis is still fresh in the minds of many investors. Until the current fear of recession has been completely overcome, I remain cautious about placing too much bets on Barclays.
The conclusion
At first glance, Barclays’ growth prospects look better than Lloyds’. But it’s precisely these numbers that give me cause for concern. The bank may promise a better return – but what risk?
As an established market leader, Lloyds seems more stable to me, if somewhat less exciting.
So maybe it’s best to keep a bit of both?
The post Lloyds share price is lagging far behind Barclays! Which bank is the better buy? appeared first on The Motley Fool UK.
Further reading
Mark Hartley holds positions in Barclays Plc, Lloyds Banking Group Plc and Tesco Plc. The Motley Fool UK has recommended Barclays Plc, Lloyds Banking Group Plc and Tesco Plc. The views expressed on companies mentioned in this article are those of the author and may therefore differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2024
