After years of dismal performances, I am finally tempted by the big FTSE 100 banks, which are beginning to look like bargain UK shares. Barclays, HSBC Holdings, Lloyds Banking Group and NatWest Group have all seen their share prices roughly halve this year. This will understandably scare many investors away. But I see this as an opportunity as they’re now too cheap to ignore.
A stock market crash offers a chance to pick up bargain UK shares in sectors that have been heavily sold off. Naturally, there are risks. But if you plan to hold for the long term, there are massive rewards as well.
All four big banks delivered a better third quarter performance than analysts expected this week. Their share prices have bounced as a result, with NatWest up more than 5% this morning. Rather than UK shares to avoid, they may now be bargains to buy.
Covid-19 has been hard on the banks, and there could be worse to come if we get a second lockdown. The big banks will bear the brunt again.
I’m tempted by these bargain UK shares
All-time low interest rates are squeezing net interest margins, the difference between what they make from lending money and earn from taking deposits. If the Bank of England introduces negative rates, that squeeze could intensify.
The UK faces millions of redundancies, and that could lead to a surge in bad debts. Banks are already responding, by tightening mortgage criteria, and dropping some of their best credit card deals. Less activity means lower profits, so why do I think the big banks look like bargain UK shares?
Last week, Barclays reported better-than-expected Q3 profits of £1.1bn, double analyst forecasts. On Tuesday, HSBC posted profits of $3.1bn, again beating the $2.07bn analysts had anticipated. Yesterday, Lloyds also beat Q3 forecasts, with £1bn pre-tax profits, and NatWest made it four out of four today, with a pre-tax profit of £355m, thrashing estimates of £75m.
FTSE 100 stock market crash opportunities
I wouldn’t get carried away and start throwing money into at the big banks, as the future remains uncertain. Loan impairments were lower than expected in Q3, but the agony may simply have been postponed. However, I’d consider building a position as these UK shares now trade bargain valuations.
NatWest’s P/E ratio now stands at just 4.51 times earnings. For Barclays, the figure is 7.32 times earnings, and 8.08 times for Lloyds. China-focused HSBC is pricier, at 13.96 times earnings. These are still bargain UK share prices though. Their price-to-book ratios are even more tempting. Lloyds and HSBC’s assets are valued at just 0.4 times their book value. Barclays is even cheaper at 0.3.
You’ll not get any dividends for now. The banks are well capitalised and clearly itching to revive shareholder payouts, but require a green light from the regulators. Dividends will return, possibly in 2021. And when they do, I reckon these bargain UK shares should look even more rewarding.
