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Why I’d buy the Barclays and RBS share prices now the election is over

Alan Oscroft
EU and UK flag on broken wall

The possibility of a no-deal Brexit has been the biggest fear surrounding the UK’s banks for more than three years now, and it’s been holding back hopes of share price progress. While the UK’s status as the EU’s banking centre is, obviously, already over, exiting without a trade deal could plunge us into economic disaster, and that would hit the banks hard.

Those fears have lessened now that the Conservatives have gained such a large majority in parliament, and banking stocks have already made a little progress. I’ve written about my purchase of more Lloyds Banking Group shares (which I bought a little before the election), and by close of play Monday they had gained 8.3% since the vote.

Even better

Royal Bank of Scotland (LSE: RBS) and Barclays (LSE: BARC) had done even better, both up 12%, but they’re all slipping back again as I write on Tuesday — with Lloyds down 4.7%, RBS down 4%, and Barclays 2.8%. The partial reversal is all down to Boris Johnson’s latest plan to make it unlawful for Brexit trade negotiations to extend beyond 2020, and that’s brought the spectre of a no-deal departure back into view. What on earth is he thinking?

Anyway, I do think the prospects for our banks have improved, and if I hadn’t already topped up on Lloyds, Barclays and RBS would be high on my list.

There’s one extra worry been removed from Royal Bank of Scotland as a result of the election. While there was nothing firm, Jeremy Corbyn had entertained the notion of nationalising RBS and turning it into some sort of ‘people’s bank’, thus bringing to a sharp halt the excellent progress the board has made since it inherited an almighty mess from Fred Goodwin.

Recovery

But that’s off the table now, and shareholders can look forward to forecasts for the current year, with an EPS rise of an impressive 73% on the cards. Topping off the past couple of years of growth, it suggests a P/E of 10.9. That’s higher than Lloyds on a multiple of 8.7, but earnings growth at RBS has lagged behind Lloyds and looks stronger over the next couple of years, so I think the two are about comparable.

It looks like there’s probably a sustainable dividend yield from RBS of around 5% too, and the bank has comfortably passed the latest Bank of England stress tests, which were pretty onerous.

Well prepared

Barclays has just done the same, and I think it’s perhaps looking even better value than RBS right now. Barclays’ post-crisis recovery has suffered setbacks, but earnings looked like they were back on track last year, and the solid growth forecast for this year gives us a P/E of 8.3 while dividends are also yielding around 5%.

As my Motley Fool colleague Rupert Hargreaves has pointed out, Barclays is well positioned for Brexit, providing we get an orderly one — and despite Boris’s latest perplexing move (which seems pointless at best, and potentially damaging), the chances of getting out in a healthy position have significantly improved.

All Barclays needs is for Brexit to happen and for politics to get out of the way, and allow it to carry on with its well-planned business.

Despite some uncertainty in the year ahead, I reckon 2020 could be a great year for Barclays and RBS.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may 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 2019