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Why This Fund Manager Is Backing Barclays PLC (ADR) (BCS), Lloyds Banking Group PLC (ADR) (LYG), and Royal Bank of Scotland Group plc (ADR) (RBS)

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LONDON — Thomas Moore is an investment director at Standard Life Investments. I recently spoke with Moore to understand why he believes these three bank shares are a good bet.

Barclays PLCThe sector
All three have had a great 12 months. In the last year, shares in Barclays PLC (ADR) (NYSE:BCS) are up 46.2%. Lloyds Banking Group PLC (ADR) (NYSE:LYG) is up 80.7%, and Royal Bank of Scotland Group plc (ADR) (LSE:RBS) is ahead 22.3%.

Yet, Moore believes further rises are ahead. “The banks have largely erased their capital deficits. They can no longer be accused of having a capital shortfall. In the case of Lloyds Banking Group PLC (ADR) (NYSE:LYG) and Royal Bank of Scotland Group plc (ADR) (LSE:RBS), there were large non-core assets that have had to be worked off. The stronger economic environment will help with this immensely. Reasons for these stocks to trade at a discount are disappearing quarter by quarter.”

The politics
Considerable political heat has been turned on the banks since the credit crunch. This hasn’t just been the media — government ministers have also attacked them regularly. This has included calls for tighter controls on staff pay, more regulation and big changes in the way that the banks operate. None of this has been good for share prices. However, there are signs that such pressures are now easing. There is now little political capital to be made from bank-bashing.

“Regulatory pressures are easing,” says Mr Moore. “There are clearly no serious capital problems among the listed banks. It is now in politicians’ interest to see that the government stakes in Lloyds Banking Group PLC (ADR) (NYSE:LYG) and Royal Bank of Scotland Group plc (ADR) (LSE:RBS) are returned to private ownership. Their interests are now aligned with shareholders’ as the taxpayer needs to recoup its losses. To achieve this, there has to be an understanding that the banks must be allowed to get back to making profits.”

Barclays PLC (ADR) (NYSE:BCS)
“Barclays PLC (ADR) (NYSE:BCS) is a company that the U.K. should be proud of,” says Moore, “The company has great pedigree, built over more than one hundred years. Today, Barclays PLC (ADR) (NYSE:BCS)’s core operations deliver returns well in excess of the bank’s cost of capital. The LIBOR scandal and chief executive Bob Diamond’s departure were a great a buying opportunity.”

Barclays PLC (ADR) (NYSE:BCS) shares currently trade at 8.6 times broker forecasts for 2013. That’s significantly below the price-to-earnings (P/E) ratio of 11.6 that HSBC Holdings plc (ADR) (NYSE:HSBC) enjoys. Barclays PLC (ADR) (NYSE:BCS) is forecast to increase its dividend 11.3% this year, followed by a huge 28.7% rise for 2014. The forecast earnings and dividend growth mean that the shares are available today on a 2014 P/E of just 7.2 times analyst estimates, with the prospect of a 3% dividend yield.

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