Lloyds Bank and Barclays side-by-side

With Lloyds Banking Group (LSE: LLOY) about to publish its first half (H1) earnings results on Wednesday 27 July and Barclays PLC (LSE: BARC) its H1 earnings on Thursday 28 July 2022, which is the better share to buy?

Both Lloyds and Barclays banks have strong balance sheets, a high earning yield and a well-covered cash dividend but the latter has an investment banking division, whose earnings can be profitable but also volatile.

Having said that, under its new CEO, Charlie Nunn, Lloyds bank announced it is going to start expanding its wealth management and investment banking divisions which will give it more international exposure and additional sources of income, but this may also lead to more share price volatility.

Lloyds Banking Group, which incorporates Halifax, the Bank of Scotland, and Scottish Widows, amongst others, is seen as a good proxy for the UK economy because of its 30 million customers and exposure to British consumers.

With UK house prices for now not seeming to slow down despite headwinds such as soaring inflation, rising interest rates and the cost-of-living crisis, the UK’s biggest mortgage lender should continue to benefit from this growth.

Furthermore, the bank’s new venture Citra Living, which will see Lloyds trying to buy 10,000 homes by 2025 and 50,000 over the next decade, would make it the UK’s largest landlord with a £4 billion portfolio, larger than the current biggest, Grainger PLC, which has a portfolio of just over £2bn.

Just like for its competitor, rising UK interest rates could provide a boost to the Barclays share price, especially since its recent acquisition of Kensington Mortgages for £2.3 billion at a time of intense competition in the mortgage market, could bolster the bank’s profits.

The Bank of England’s (BoE) fifth rate hike since December 2021 by a quarter point to 1.25% in mid-June, should benefit both lenders, provided that the housing market remains buoyant, and that the UK economy doesn’t slide into a recession. Further rate hikes are expected to be seen in August while the BoE is trying to stifle soaring inflation which hit a 40-year high of 9.4% in June.

According to Reuters, Lloyds Banking Group’s second quarter pre-tax profit is expected to come in at £1.67 billion, down from £1.99 billion in Q2 2021, whereas for Barclays these numbers come in at £2.07 billion for Q2, down from £2.64 billion a year earlier.

The earnings per share (EPS) for both banks are expected to be lower than a year ago at 1.59p (-50.9%) for Lloyds and 7.57p (-40.3%) for Barclays.

From a fundamental point of view both banks’ shares look undervalued with a Reuters Refinitiv poll of top analysts showing five ‘strong buy’, eight ‘buy’ and nine ‘hold’ and a median long-term price target of 237.5 pence, up by 50% from current levels for the Barclays share, and four ‘strong buy’, 12 ‘buy’, five ‘hold’, three ‘sell’ and a median price target of 60 pence, up 38% (as of 26 July 2022), for the Lloyds Banking Group share.

Technical analysis outlook on the Barclays and Lloyds share price

Is the Barclays share a technical buy?

Year-to-date the Barclays share price has underperformed the FTSE 100 and is currently down by around -19.5% whereas the Lloyds share price trades around 13% lower (as of 26 July 2022) than at the start of the year, compared to less than -2.5% for the FTSE 100.

It is interesting to see that the Barclays share price trades back around the 55-day simple moving average (SMA) at around 157 pence and is currently being capped by its breached May-to-June uptrend line, which, because of inverse polarity, is acting as a resistance line at 161p.

If it and the mid-June high at 163p were to be exceeded, a bullish continuation of the Barclays share price’s advance from its mid-July low at 145p, made marginally above the March-to-May lows at 142.1p to 140.1p, is expected to unfold.

 

In this scenario the mid-March, late May and early June highs as well as the 200-day SMA at 173p to 178p could be reached over the summer months, a rise of around 11% from current levels (as of 26 July 2022).

If overcome, a long-term bottoming formation would be confirmed with the January peak at 214.6p being back in the limelight, some 36% above current levels (as of 26 July 2022).

Only a currently unexpected bearish reversal and fall through the 142.1p to 140.1p support area would negate the current short-term bullish outlook and may lead to a sell-off taking the share to the 129.5p to 125.1p region which consists of the June 2020 high and January 2021 low and is also where the 61.8% Fibonacci retracement of the 2020-to-2022 advance can be found.

What about the Lloyds share price?

The mid-July Bullish Engulfing pattern on the daily candlestick chart, where the 15 July bullish candle ‘engulfed’ the previous day’s bearish candle, pushed the Lloyds share price up by around 7% to its 2022 downtrend line which capped it at 44.45p last week and again this week.

 

For the Lloyds share price to gain traction, a rise and daily chart close above the current July high at 44.45p needs to be seen, in which case the June high and 200-day SMA at 46.16p to 46.30p would be in focus.

Further up beckon the March high at 49.17p and the January and February highs at 52.90p to 54.31p in this scenario. It will remain valid as long as the current July low at 40.89p isn’t being slipped through. Failure at 40.89p would probably push the March low at 36.98p back to the fore and also target the June 2020 high at 35.90p.

From a fundamental and technical point of view it may make sense to buy both shares with stop-losses placed below the most recent significant lows, in case of Lloyds below 40.89p and Barclays below 140p.

Axel Rudolph | Market Analyst, London
27 July 2022