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Why Barclays PLC (BARC) Beats Royal Bank of Scotland Group plc (RBS) and Lloyds Banking Group PLC (LLOY)

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Barclays PLCLONDON — In my previous pick-of-the-sector report, I went for GlaxoSmithKline in the pharmaceuticals sector, and today I’m turning my attention to the banking industry. There are some who wouldn’t trust a penny of their investment money to a bank, but there must be a price at which they’re worth buying, mustn’t there?

I’m making my pick from the five banks listed on the FTSE 100, which are Barclays PLC (LON:BARC), Royal Bank of Scotland Group plc (LON:RBS), Lloyds Banking Group PLC (LON:LLOY), HSBC Holdings plc (LON:HSBA), and Standard Chartered PLC (LON:STAN).

Here are some numbers:

Company HSBC Lloyds Barclays RBS Standard Chartered
Market cap £139bn £41.9bn £40.4bn £18.2bn £38.3bn
Share price 743p 59p 314p 299p 1,585p
Share price growth +46% +130% +78% +50% +21%
Historic EPS growth -20% n/a +24% n/a +14%
Forward EPS growth +33% n/a +3% +265% +3%
Historic P/E 13.3 n/a 7.6 51.5 10.6
Forward P/E 11.6 13.0 8.9 13.2 10.5
Historic PBV 1.3 0.9 0.7 0.3 1.4
Historic Dividend 4.6% 0% 2.5% 0% 3.5%
Forward Dividend 4.4% 0.2% 2.3% 0% 3.8%
Forward Cover 1.9x 30x 4.8x n/a 2.5x

Share price growth is over the past 12 months, historic figures are for December 2012, forward figures are based on December 2013 forecasts.

Standard Chartered
I do quite like the look of Standard Chartered. It’s on a modest price-to-earnings (P/E) ratio, both historic and prospective, and pays a decent dividend. And perhaps more importantly, it does most of its business in Asia and escaped the worst of the Western banking crisis — and wasn’t involved in mis-selling or LIBOR-fixing scandals, or anything like that. But it’s for those reasons that Standard Chartered is not my choice — it’s hard to compare with the others, and I really want to look at U.K. high-street banks.

The bailouts
There’s really no disputing that the two bailed-out banks, Lloyds Banking Group PLC (LON:LLOY) and Royal Bank of Scotland Group plc (LON:RBS), are on the road to recovery — and they’ve already rewarded investors over the past couple of years, although Royal Bank of Scotland Group plc (LON:RBS) shares have slumped since the start of this year. But since the bailout, taxpayers are actually still sitting on losses with both banks.

One thing that makes these both unattractive to me, though, is how hard it is to value them at this stage in their turnaround. Both are trading at less than net asset value, with Royal Bank of Scotland Group plc (LON:RBS) on a price-to-book value of only 0.3, which suggests there’s value there — but we have P/E values that can’t really mean much at the turnaround point, and no dividends to speak of. We also have no idea what the government will do with our taxpayers’ stake, or when anything will happen, and I tend to steer away from companies whose valuations are so much at the whim of governments. So these two are also out for me.

Last two standing
For me it’s down to Barclays PLC (LON:BARC) or HSBC Holdings plc (LON:HSBA), and I do like the latter. But HSBC Holdings plc (LON:HSBA) looks reasonably fully valued to me — the shares are selling for around 1.3 times net asset value and P/E is a little below the FTSE’s long-term average, though there’s a decent dividend expected of 4.6%.

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