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Barclays’ (LSE: BARC) shares have had a brilliant run, soaring 170% in five years. But they’ve been beaten by rival FTSE 100 bank NatWest (LSE: NWG). It’s up a staggering 225%.
Their performances have been driven by rising interest rates, which allowed them to widen net interest margins and increase profits. So investors have started seriously looking at UK banking stocks again, both for share price growth and dividend income. But which bank is more tempting?
The banking backdrop
My first question is a wider one. Can the good times continue as the economy gets bumpier?
At the start of the year, interest rates were widely expected to fall. Because of the Iran war, that hasn’t happened. Instead, markets are pricing in four UK base rate hikes next year.
That should support net interest margins, but there’s a catch. The slowing economy could reduce demand for mortgages and savings products, while pushing debt impairments higher.
Barclays and NatWest face political risk too, with speculation about a windfall tax in the Autumn Budget. Another worry is that after such a strong share price performance, gravity may naturally assert itself.
Quick profit comparison
NatWest’s latest results were impressive. First-half operating profit rose 20.4% to £4.32bn, while income increased 11% to £8.86bn. Net interest margins edged higher, reaching 2.49% in the second quarter.
It’s still primarily a UK bank, although it’s finding new ways to grow. The recent Evelyn Partners acquisition has more than doubled assets under management to £130.6bn.
NatWest has also been generous to shareholders, raising its interim dividend 26% to 12p a share. The trailing yield is a juicy 4.75%.
Barclays also had a strong first half, with profit before tax up 17% to £6.07bn. Income rose 11% to £16.5bn, helped by its investment bank and strong trading conditions. Margins rose from 3.55% to 3.7%, comfortably beating NatWest.
That global operation gives Barclays a different risk profile. It brings greater exposure to corporate and investment banking, but also more opportunities to grow beyond the UK. Barclays is still delivering plenty for shareholders, announcing a £1bn share buyback.
Price-to-earnings ratios
Impressively, both shares continue to grow, with Barclays and NatWest up around 30% this year. NatWest is cheaper, with a price-to-earnings ratio of 10.3 against 11.3 for Barclays. There isn’t much in it though. Barclays yields just 1.79%, against 4.75% for NatWest.
But that’s partly because it aims to reward investors more through buybacks. Those who prefer dividend income may favour NatWest as a result. That was my position, and I bought the bank in May.
So what do the brokers say? Consensus 12-month stock forecast for Barclays is 573p. If correct, that would be a pretty decent 19.2% increase from today’s 480p. The consensus one-year NatWest target is 799p, up a slightly lower 16.1% from 688p. Still good though.
I think both are worth considering for investors seeking long-term banking exposure. They may slow after such a strong run, but both have plenty to offer. Splitting the difference isn’t the worst idea. And there are other lucrative FTSE 100 opportunities that I’ve got my eye on…
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Harvey Jones owns shares in NatWest.
This story originally appeared on Motley Fool
