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Should I buy FTSE 100 bank stocks BARC, HSBA, LLOY, NWG and STAN?

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The big FTSE 100 bank stocks — Barclays, HSBC, Lloyds, NatWest and Standard Chartered — have seen strong recoveries in their share prices over the last year. And they’ve largely extended their gains since releasing half-year reports in recent weeks.

However, their performances still lag the wider market over longer timescales. As such, and with the pandemic beginning to move into the rear-view mirror, I’m wondering if now’s a good time for me to buy these FTSE 100 bank stocks.

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Performance in perspective

The table below highlights the recent strength of the banks’ performances and their generally underwhelming longer-term returns.

 

Since results (%)

1 year (%)

3 years annualised (%)

5 years annualised (%)

10 years annualised (%)

Barclays

7.8

73.5

0.8

5.5

2.9

HSBC

3.1

29.4

(12.4)

0.8

2.4

Lloyds

(0.4)

69.8

(5.9)

1.8

6.5

NatWest

5.3

95.4

(0.8)

6.6

(1.4)

Standard Chartered

5.2

17.6

(11.0)

(4.9)

(6.7)

Average

4.2

57.1

(5.9)

2.0

0.7

FTSE 100

22.1

1.4

4.9

7.1

It’s more than a decade since the great financial crisis. The banks have been through a long period of balance-sheet repairs, fines and compensation payments, and unprecedented low interest rates. In view of this unhelpful backdrop for their businesses, I’m not surprised by those weak multi-year returns.

Current valuation of these FTSE 100 bank stocks

Despite the recent strong performances in their share prices, the banks still look cheap on a number of valuation measures. The table below details their price-to-book (P/B) and price-to-earnings (P/E) ratios, and their dividend yields.

 

Share price (p)

P/B

Forward P/E

Forward dividend yield (%)

Barclays

182.7

0.5

6.4

3.3

HSBC

409.9

0.6

10

4.2

Lloyds

46.6

0.7

6.8

4.9

NatWest

215.7

0.6

14

3.9

Standard Chartered

459.2

0.4

9

3.3

The P/B ratios in particular ping my value antenna. As you can see, I can currently buy £1 of these banks’ assets for between 40p (Standard Chartered) and 70p (Lloyds). If I believe the banks’ valuations are cheap, what do I think would be a more reasonable valuation?

Future valuation

Given the protracted post-financial-crisis period of those balance-sheet repairs, fines and compensation payments, and unprecedented low interest rates, it’s not easy to judge how the valuations of these FTSE 100 bank stocks might look in more ‘normal’ times.

At the end of the day though, if they’re making profits and paying dividends, I find it hard to imagine them not commanding a P/B of at least 1 — or maybe a bit above and bit below through the economic cycle. In view of the P/Bs between 0.4 and 0.7, I think BARC, HSBA, LLOY, NWG and STAN are very buyable for me at today’s share prices.

FTSE 100 bank stocks: risk and reward

I do see some risk in investing in these banks. Their different geographical focuses provide them not only with opportunities in those regions, but also different geopolitical risks. For example, HSBC’s pivot to Asia makes it highly dependent on the future fortunes of China. Lloyds and NatWest are almost entirely geared to the prospects of the UK economy.

Together, the five bank stocks provide me with some diversification against geopolitical risk. But I have to recognise we live in a highly interconnected world, and that the financial system is a big part of it. My investments could suffer in the event of a global recession, or from the likely contagion of a major financial crisis in one of the world’s key economies.

Nevertheless, I think the current P/Bs of the five offer good share-price upside, if all goes well in the world over the next few years. And at least some downside protection, if it doesn’t. In essence, this is why the stocks are on my buy list.

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Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies still trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, Lloyds Banking Group, and Standard Chartered. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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