On Tuesday, the Bank of England warned all FTSE 100 banks against paying out dividends to shareholders. As a result, UK bank stocks plummeted in early trading on Wednesday, wiping billions off valuations.
The announcement rubs salt in the wounds of an already pummelled FTSE 100, just after the index had its worst quarter since 1987.
As pension funds and income investors have already suffered from dividends cuts across the index, this announcement represents another big hit to digest. Some companies were due to pay out dividends in just two weeks’ time.
Although the circumstances remain rather bleak, I think now is a good time to buy shares in FTSE 100 banks. Here’s why:
Dirt-cheap valuations
First and foremost, the recent plummet in share prices among FTSE 100 banks means most are trading on dirt-cheap valuations. This is especially striking in comparison to pre-crash prices.
Compared with around a 30% fall in the FTSE 100 index, some bank shares such as Lloyds and Barclays have shed over 50% of their value. Alongside airline and housebuilding stocks, banks have been particularly hard hit.
One of the ‘big four’ British banks, Barclays is now trading at a price-to-earnings ratio of around 6.58. A figure like that suggests to me that there’s some value to be had.
But what about the prospects of survival for these companies?
Strong and resilient banks
Unlike the 2008 financial crisis, responsibility for the 2020 stock market crash doesn’t lie with the banks. Since then, financial services have slowly been regaining the trust of the general public.
The coronavirus outbreak remains largely responsible for the current tumble in stock markets around the world.
Rising fears about the economic impact of a global pandemic on growth and development has caused financial markets to experience immense volatility.
Although this will inevitably affect financial services negatively, I think investors may be overstating the impact of the crisis on these companies.
Today, Britain’s blue-chip banks are designed to be far more resilient than they were in the 2008 crash. By law, minimum bank reserves must cover enough costs for times of economic uncertainty and instability.
Light at the end of the tunnel
With that in mind, I think banks’ balance sheets and healthy levels of liquidity are enough to see them through the difficulties that may lie ahead.
With restrictions and lockdowns already starting to ease in some parts of the world, it may not be long before business begins to operate as usual once again.
When the time comes, banks will quickly return to full operational capacity. This means investors can expect dividend payments to swiftly resume. I think FTSE 100 banks could even be the drivers of the next bull market.
Dividend yields on FTSE 100 bank stocks are notoriously attractive to income investors and will undoubtedly remain so, even after the pandemic is over.
On top of this, I think shareholders will be rewarded with more healthy returns as investors realise the UK bank stocks may be undervalued. The likes of HSBC, Barclays, and Lloyds are still a solid buy for me.
