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Lloyds Banking Group (LSE: LLOY) has been my go-to bank sector choice for years, but could Barclays (LSE: BARC) shares be the new growth champions in 2026?
Barclays might not have much to shout about in the way of dividends, not with a forecast yield of just 1.9%. But I see a few key reasons why it might have the potential to beat its competitor.
One is valuation, with Barclays on a forward price-to-earnings (P/E) ratio of 10.8 — even after the price gains of the past couple of years. That might not be screaming cheap any more, but it’s significantly lower than the multiple of 14.2 on the cards for Lloyds.
Both valuations are forecast to fall in the next few years with earnings predicted to rise. But right now, I’m not seeing the safety margin I’d ideally like from Lloyds. But what might set these two apart over the next decade is the differences in their business strategies.
In response to the 2008 financial crash, Lloyds retreated inwards. It abandoned its relatively high-risk global and investment banking operations, and turned its focus to the UK high street. Domestic lending, and especially the mortgage market — that’s what makes up the bulk of Lloyds’ future now.
I’m not saying I see that as bad. I reckon we could be in for good times with the Bank of England poised to lower interest rates. And as inflation drops, albeit slowly, I can see mortgage lenders showing strong prospects. It could be a good year for housebuilders too.
Go global
UK banking is constrained by the economic prospects for this country. But there’s no such limitation on Barclays — which has continued to pursue its US, investment and global corporate banking businesses.
With October’s third-quarter results, Barclays reported UK corporate banking income up 17% year on year. Investment bank income rose 8%, and US consumer banking climbed 19%.
Investment and international corporate banking bring higher risk. And let’s not forget it was the US sub-prime mortgage crisis that kicked off that 2008 meltdown. But I think covering all aspects of the banking business could give Barclays an edge in the coming years.
Set for a fall?
Some investors will look at this year’s gains for Lloyds and Barclays shares and call an end to the upwards run. After all, mature FTSE 100 banks aren’t supposed to soar that much in a year — 71% and 67%, respectively — surely? I mean, they’re not penny shares or small-cap growth stocks, right?
But I see a different lesson to take from this. It reflects the massively irrational undervaluation the shunned banking sector fell to in the post-Covid years. And it reinforces the wisdom of buying shares when they’re down and holding on to them.
Where bank shares will go next year we really can’t say, with 2026 valuations higher than they’ve been for some time. I wouldn’t be surprised to see some weakness as cash shifts to other recovering sectors. Still, if that happens I’ll see it as a buying opportunity — and maybe add some Barclays shares to my Lloyds holding.
