Today, we present the long-term investment case for two banking stocks.
Recent days have seen pressure on banking stocks, which may be attributed to waves from events across the pond.
So we asked two Fools to list their favorite shares in the industry right now and explain why they like them. Please be aware that returns are not guaranteed and that past performance does not guarantee future success.
Banking Stocks: Lloyds
Lloyds is more resilient than most to downturns
Purchasing banking stocks, in our opinion, is a risky investment considering how quickly they can collapse. As a result, it is crucial to invest in a bank with enough liquidity and a strong balance sheet, particularly in light of recent events related to Silicon Valley Bank’s collapse.
Unlike their US rivals, UK banks are not as highly exposed to risk-weighted assets. Hence it’s unlikely that a bank run would result in a liquidity crisis. Because it has a strong balance sheet and can generate high returns, we think Lloyds (LSE: LLOY) offers the best risk-to-reward proposition.
The Black Horse bank still outperforms its big four competitors in having superior countercyclical buffers, despite the fact that several of its UK-based rivals have healthier financials. In other words, the ability to sustain possible losses during the market and economic downturns makes Lloyds a much stronger bank. This is evidenced by its better CCLB (countercyclical leverage ratio buffer), CCyB (countercyclical capital buffer), and CET1 ratios (which compare a bank’s capital to its assets).
| Metrics | Lloyds |
| CET1 ratio | 15.1% |
| CCLB ratio | 0.3% |
| CCyB ratio | 0.9% |
Although not the most affordable option among the FTSE banks, Lloyds’ shares are still reasonably priced when compared to the industry average.
| Metrics | Lloyds | Industry Average |
| P/B value | 0.7 | 0.7 |
| P/E ratio | 6.4 | 9.2 |
| FP/E ratio | 7.0 | 6.3 |
Despite the British-centric lender’s forecast for reduced net interest margins, its return on tangible equity (ROTE) is still anticipated to outperform those of the other lenders at 13%, making it the most attractive option. This implies that the return on our investment will be larger. Combining that with the UK housing market’s long-term growth expectations makes investment in the biggest mortgage lender in the nation look more profitable, especially given recent declines.
Banking Stock: Barclays
Barclays at an unbeatable price
If you had asked us a few weeks ago for our favorite banking stock, we would have said Lloyds. But, given recent developments, we now believe Barclays (LSE: BARC) has an advantage in the value stakes.
In the U.S., the collapse of Silicon Valley Bank, which was controlled by SVB Financial Group, shook Wall Street. The bankruptcy of Signature Bank subsequently caused massive panic.
Investors on both sides of the Atlantic are now concerned about a major banking crisis. What is it related to Barclays?
After the major financial crisis, Barclays is the only UK bank that has truly embraced worldwide commercial banking. As a result, unlike Lloyds, it has significant exposure to the US banking industry.
There is a significant risk, and we can see shareholders selling their investments. But does a sell-off that size justify it? We don’t think so.
Market panic has pushed Barclays shares to a price-to-earnings (P/E) multiple of under five, based on 2023 forecasts. We consider that to be an unreasonable overreaction.
Barclays is subject to FCA regulation, which is one of the strictest in the world. The era of risk and liquidity free-for-all has passed. That is considerably different from the US, where regulations have been relaxed (allowing what looks like recklessness at Silicon Valley).
Barclays appears to be valued to collapse. Yet, even though we see a large short-term risk, we believe there is little to no chance of that happening.
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