Many analysts predict the impact of Covid-19 on the financial sector to be deep and lasting. In the current crisis, banks are bleeding cash and experiencing a surge in bad loans. Inevitably, this has impacted UK bank shares, with many now trading on reduced valuations relative to pre-crisis levels.
In light of the current economic climate, should investors buy, sell or hold UK bank shares? To give an answer, I’m going to consider the finical position of the banks and whether they look set to recover from a prolonged economic downturn.
Plunging profits
In a report outlining first-quarter results, Barclays (LSE: BARC) reported a £600m fall in profit. That’s a staggering 40% drop, mainly driven by substantial impairment charges of £2.1bn.
Earlier this week, global banking heavyweight HSBC (LSE: HSBA) reported a similar reduction in profit by 48%, to $3.2bn. Similarly, the group highlights credit impairments charges, lower revenue and higher-than-expected credit losses as key factors behind the concerning set of results.
The story was even worse at Lloyds (LSE: LLOY) where profits crashed from £1.6bn to just £74m. That’s a 95% slump accompanied by a monumental impairment charge of £1.4bn to cover expected credit losses.
That said, despite plunging profits, it’s worth noting that all three banks are keen to emphasise the strength of their respective positions.
HSBC reported a stable position, “with robust levels of capital, funding and liquidity”, while Barclays’ CEO Jeff Staley stressed that “the group’s position remains robust”. Likewise, Lloyds reported “balance sheet strength maintained with capital, funding and liquidity remaining strong”.
Slipping share prices
Since mid-February, all three companies have seen billions wiped from their valuations. The Barclays and Lloyds share prices have fallen by around 42% and 43% respectively, while HSBC’s has dropped by 28%.
Barclays and HSBC are trading on valuations not seen since 2009, while the Lloyds share price is the lowest it has been since 2012.
While the future of these banks remains precarious, I’m confident that all three remain well-set to see themselves through a prolonged period of crisis.
What’s more, first-quarter results weren’t a story of complete doom and gloom. Barclays’ investment banking division reported a stellar performance with fixed income revenue rising by 106%. This will greatly help to offset losses elsewhere in the group.
Bargain buys
In my view, shares in these UK banks look like bargain buys that could be set to deliver attractive returns over the long term.
The blue-chip banks in the FTSE 100 index are renowned for their bumper dividend yields and the sooner they can return to paying these out, the better the outlook for investors.
I particularly like the look of Barclays and Lloyds shares as I think their respective price-to-earnings ratios of 7.4 and 9.2 imply there’s value to be had.
On top of this, all three banks have suspended dividends in an attempt to shore up extra cash. For me, this measure, combined with robust balance sheets and high levels of liquidity, should be enough to ensure they come out the other end intact.
For that reason, I rate these UK bank stocks as buys. In my opinion, shares in all three offer the prospect of decent returns over the long term, once the economy gets back on track and dividend payments resume.
