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Was Selling Barclays PLC (ADR) (BCS) and Lloyds Banking Group PLC (ADR) (LYG) My Biggest Ever Mistake?

LONDON — Most investors, like most journalists, hate admitting their mistakes. Since I’m both an investor and a journalist, this is going to be doubly painful, but here goes. I sold my stakes in Barclays PLC (ADR) (NYSE:BCS)and Lloyds Banking Group PLC (ADR) (NYSE:LYG)on 30 December 2011, exactly three days before they finally began a full-blooded recovery. Since I sold, both stocks have roughly doubled in value. And with analysts now slapping the words “strong buy” over both banks, my decision just looks worse by the day. So what does the future hold for these two banking monoliths?

Barclays PLC (ADR) (NYSE:BCS)

Meat is murder
It has been a good year or so for Barclays and Lloyds, and it just gets better. Shares in Barclays rose 8% on Wednesday after it filed a 26% year-over-year rise in adjusted pre-tax profit to 7.04 billion pounds, and further gladdened the market by unveiling a massive 1.7 billion-pound cost-cutting plan. Only the stock market could celebrate 3,700 job losses, but since this should generate nearly 500 million pounds worth of savings in the first quarter, you can see why. Investors were also delighted by Barclays’ plan to start raising dividend payments from 2014, with the aim of paying 30% of the group’s profits over time. These were meaty results, and murder for me.

Lean or mean?
There was a bit of misery for me to cling to, though. Barclays still faces potential litigation and class action over its role in fixing LIBOR, and has set aside a whopping 2.6 billion pounds in PPI mis-selling compensation. There is another scandal in the pipeline, for mis-selling Interest Rate Hedging Products to smaller businesses, and nobody knows how much that will cost. Barclays’ capital cushion, or core tier 1 ratio, fell slightly, and it posted a 466 million-pound statutory loss for the fourth quarter of 2012. New chief executive Antony Jenkins has no investment banking experience, which worries some analysts. Barclays currently yields just 2%. The only thing it hasn’t been accused of in the last five years is mis-selling its own grandmother. Its five new stated values of “respect, integrity, service, excellence and stewardship” sound good in a press conference, but could prove meaningless in practice.

Lloyds’ commotions
Lloyds has more than a few problems of its own. It has had to fork more than 5 billion pounds following their PPI mis-selling, and it also got caught up in the LIBOR scandal and the interest rate swaps scandal, and… oh, I lose count. Many investors will be concerned that its own cost-cutting strategy, shedding 15 of its 30 international activities by 2014, will make the bank unduly dependent on the ailing U.K. market. LLoyds is still 40% owned by the U.K. government, and the ultimate sell-off will no doubt dent its share price. If you thought Barclays’ 2% yield was bad, Lloyds doesn’t pay a dividend at all. As yet, it hasn’t been found guilty of mis-selling its own grandmother, but you can’t rule anything out.