2016 has been a hugely disappointing year for investors in Barclays(LSE: BARC) and RBS(LSE: RBS). Their shares have fallen by 22% and 24%, respectively, and their outlooks appear to be as uncertain as ever.
For example, Barclays' new strategy doesn't appear to have been warmly welcomed by the market, with news of its slashed dividend hurting market sentiment. Similarly, RBS seems to be further away from full recovery than had been anticipated by the market, with legacy issues continuing to peg back its overall performance.
However, both stocks have the scope to rise by at least 30% over the medium-to-long term. A key reason for this is their expected performance over the next couple of years. In the case of Barclays, it's forecast to be highly profitable in both years and with its bottom line due to rise by 23% in 2016 and 22% in 2017, there's a clear catalyst to improve investor sentiment moving forward.
Meanwhile, RBS is also expected to be profitable in 2016 and 2017, with its net profit due to rise by 18% next year. And while forecasts are clearly subject to change, RBS appears to be moving in the right direction after a hugely challenging period in recent years.
The end-of-PPI boost
Both banks should also benefit from the end of PPI claims. This could happen within a couple of years in terms of there being a deadline set for new claims to be made. An end to PPI claims could prove to be a game-changer for the entire banking sector, with billions of pounds having been set aside as provisions in case of payouts. As such, profitability for both RBS and Barclays could improve still further over the medium-to-long term and help to boost investor sentiment to an even greater degree.
With RBS and Barclays trading on relatively low valuations, a share price rise of 30% wouldn't require high ratings. For example, Barclays has a price-to-earnings (P/E) ratio of just 8.3 and so a 30% rise in its share price would leave it trading on a P/E ratio of 10.8, which is still considerably lower than the FTSE 100's P/E ratio of around 13. Similarly, RBS has a P/E ratio of 11.4 and a 30% rise in its share price would leave it trading on a P/E ratio of 14.8 which, given the prospects for improved earnings growth at the bank in future years, would be a very reasonable price to pay.
So, while 2016 has been a tough year thus far for both Barclays and RBS, both of them have bright futures and could easily rise by over 30% in the medium-to-long term. Clearly, neither bank offers high stability at the moment and both are sensitive to the wider macroeconomic outlook, but their risk/return ratios remain hugely appealing.
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Peter Stephens owns shares of Barclays and Royal Bank of Scotland Group. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.