Key Highlights
- The author expects Barclays (LSE:BARC) to outperform Lloyds Banking Group (LSE:LLOY) over the next five years.
- Lloyds has been one of the FTSE 100’s top-performing shares since 2020, but the author believes this trend may change with falling interest rates and growing investment banking activities.
- Barclays’ significant US credit card operation poses a potential threat to its share price due to increasing delinquencies among US consumers.
- The article suggests that Barclays’ investment banking division is about five times larger than its US consumer business, which could help mitigate the impact of credit issues.
Investment Outlook for Lloyds and Barclays
With Goldman Sachs reporting a 42% rise in investment banking revenues in Q2, investors are questioning whether Lloyds Banking Group (LSE:LLOY) remains the best choice for UK investors. The author of this article suggests that over the next five years, Barclays (LSE:BARC) could outperform Lloyds.
Lloyds has been a standout performer in the FTSE 100 since 2020, yet the author believes it may face challenges as interest rates continue to fall and investment banking activities expand. This shift is particularly noteworthy given that Barclays combines its retail presence with major investment banking operations, whereas Lloyds focuses almost exclusively on retail banking.
Operational Differences
The operational differences between the two banks are significant. While Lloyds benefits from higher interest rates and wider lending margins, it lacks a robust investment banking division. In contrast, Barclays’ investment banking operations could see substantial growth in the coming years as interest rates fall.
According to analysts at JP Morgan, there is a clear trend towards falling interest rates globally, which will likely benefit investment banking activities. Goldman Sachs, for instance, reported a 42% increase in its investment banking revenues during Q3, indicating that this sector could see continued growth despite current economic uncertainties.
Barclays’ US Credit Card Operation
The article highlights another critical factor: Barclays’ significant exposure to the US credit card market. As US consumers start repaying student loans (which were paused during the pandemic), their finances are becoming more strained, leading to a rise in 90-day delinquencies.
While this presents a potential threat to Barclays’ share price, the author believes it is manageable. The investment banking division’s size is about five times larger than its US consumer business, which could help offset any negative impacts from credit card problems. However, investors should monitor this issue closely in case balance sheet issues arise.
Long-Term Outlook and Investment Considerations
The author suggests that over the long term, interest rates will fluctuate. During periods of high interest rates, Lloyds is expected to perform better, while Barclays may outperform during low-interest-rate periods. Currently, the direction of travel seems clear: interest rates are likely to fall, which favors Barclays in terms of investment banking activities.
Given these factors, the author believes that Barclays is a more suitable choice for investors looking at the next five years.
However, they caution against making any large decisions without further research into specific stocks recommended by investing experts like Mark Rogers, who has run the Motley Fool Share Advisor service for nearly a decade.
Investors should consider their individual circumstances before making any investment decisions and seek independent financial advice if needed. The value of investments can go down as well as up, and you may get back less than you put in.
