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Will the Banks Beat the FTSE 100 Again in 2013?

LONDON -- The U.K.'s banks had a great 2012: Barclays (LSE: BARC  ) ended the year up 49%; HSBC (LSE: HSBA  ) was up 32%; Royal Bank of Scotland (LSE: RBS  ) rose 61%; Standard Chartered (LSE: STAN  ) advanced 11%. However, the star performer was Lloyds Banking (LSE: LLOY  ) -- the black horse galloped away, its shares ending the year 85% ahead.

Company Price (pence) P/E (forecast) Yield (forecast) Market Cap (billions of pounds)
Barclays 276 7.8 2.3 34
HSBC 666 11.8 4.1 122
Lloyds 50 20.0 0.0 35
RBS 334 19.3 0.0 20
Standard Chartered 1,610 12.2 3.2 39

I've taken a look at all five to try and believe that all will beat the market again in 2013.

Shares in Barclays have recovered strongly following the LIBOR revelations and the departure of its controversial CEO, Bob Diamond.

Like Lloyds and RBS, Barclays is a high-beta share. This means its movements have exaggerated the market's. So statistically, if 2013 is a good year for the market, we should expect Barclays to outperform it. In a bad year for the FTSE 100 (UKX), statistics suggest that Barclays would fall short.

The yield on Barclays' shares is better than what can be made on cash deposit or bonds. Moreover, Barclays shares are cheap. The company trades on just 7.4 times market expectations for 2013, well below the FTSE 100 average of 15.4.

HSBC managed to make a profit and pay a dividend throughout the financial crisis. Of all the banks featured in this article, HSBC is probably the most geographically diverse.

The shares suffered in 2012 from an expensive money-laundering scandal. Without this, the outperformance would have been even greater.

As an investment, HSBC has three big things in its favor. First, it has an admirable track record -- it is a strong company that has come through an industry crisis intact. Second, it pays a good dividend. The dividend is expected to be increased 10.5% in 2013, to give a 4.5% yield. Third, the shares are cheap. HSBC currently trades at just 10.5 times expected 2013 profits.

Lloyds Banking Group (Lloyds)
Lloyds shares stole the show last year. That's despite the company incurring the largest Payment Protection Insurance provisions.

The U.K. taxpayer owns a 40% stake in Lloyds. The breakeven price on this is 63 pence. At today's price of 50 pence, just half of last year's percentage gain would put the government well into profit.

Lloyds will likely stop reporting big PPI provisions in its trading updates this year. Impairments at Lloyds have also been falling fast. As the U.K. economy recovers, Lloyds' fightback will continue. Improved profitability will dramatically increase the possibility of future dividends.

I expect that 2013 will be the year that Lloyds takes a huge step forward in its recovery.

Royal Bank of Scotland (RBS)
RBS is majority-owned by the U.K. taxpayer.

In May 2011, RBS shares were priced at 405 pence. This was followed by the near-meltdown of the eurozone, which pushed the shares close to 200 pence in the summer of 2012. Despite the huge rise enjoyed over the course of last year, the shares remain some distance below the price they stood at for most of 2010.

I believe that the market still regards RBS as the bank most at risk. This makes the share price volatile. I continue to hold my shares in the company for two reasons. First, the shares are cheap. With the last trading statement, the company confirmed a net asset value of 476 pence. That's 43% ahead of today's share price. Second, I am expecting that newsflow from the company will demonstrate how far RBS has come in its recovery.

If the shares can reach 450 pence then that would be a 39% rise on the year. I expect that kind of rise would easily surpass whatever the FTSE manages.

Standard Chartered
This is the bank that I most expect to beat the market in 2013.

Much of Standard Chartered's business is in the Far East. This means that when the FTSE 100 suffers due to concerns about the U.K. economy, eurozone, or the U.S., the Standard Chartered share price is largely unaffected. So, even if 2013 is a bad year for the FTSE 100, that needn't mean Standard Chartered shares performs badly.

Furthermore, the way that I look at it, the shares are cheap right now. Standard Chartered's exposure to fast-growing Asian economies traditionally brought with it a high P/E rating. At this time in 2011, the shares traded on a forward P/E of 14.4. Today, the shares trade on just 11.7 times expected earnings for 2012 and 10.7 times expectations for 2013.

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