Which of these bargain bank shares would I buy?

UK bank shares look cheap to me today. These cheap stocks offer high dividend yields, plus recovery potential. I own two of these value shares already!

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UK banking is dominated by the ‘Big Four’ banks. These are Barclays (LSE: BARC), HSBC Holdings (LSE: HSBC), Lloyds Banking Group (LSE: LLOY), and NatWest Group (LSE: NWG). But which bank shares look like bargains to me today?

The Big Four bank shares

1. Barclays

My wife owns Barclays shares. They currently trade at 173.28p, valuing the Blue Eagle bank at £27.5bn. This stock peaked at 202.35p over the past 12 months, while it has lost 11.6% in the last year.

Today, I see Barclays shares as an incredible bargain. They trade on a price-to-earnings ratio of 5.8 and an earnings yield of 17.2%. This is roughly 10 percentage points above the FTSE 100‘s earnings yield.

Also, Barclays shares offer a dividend yield of 4.2%, covered 4.1 times by earnings. This is one of the strongest ratios in the Footsie, making this payout yield rock-solid to me. Hence, if I had spare cash, I would eagerly buy more Barclays shares today.

2. HSBC

Based on the current share price of 630.1p, global mega-bank HSBC is valued at £125bn. The stock is up 15% over the past year. Furthermore, its shares hit a 52-week high of 653.8p on Tuesday, following strong full-year results.

However, HSBC shares don’t look dirt cheap to me right now. They trade on a price-to-earnings ratio of 10.2 and an earnings yield of 9.8%. That’s well below Barclays’ figures.

Also, while HSBC stock offers a dividend yield of 4.3% a year, this is covered only 2.3 times by earnings. That’s roughly half the payout coverage at Barclays.

Also, HSBC has heavy exposure to Hong Kong and China, which worries me as China-US relations deteriorate. Therefore, I don’t own this stock now and won’t buy it yet.

3. Lloyds

We bought Lloyds shares for our new family portfolio last year. So far, they are our second-best performer. At the current share price of 52.1p, Lloyds is valued at £35.1bn. Its shares have lost just 0.2% over the past 12 months.

After Barclays, Lloyds would be my second pick among bank shares right now. Its stock trades on a price-to-earnings ratio of 7.2 and an earnings yield of 13.8%. Pretty undemanding, I feel.

Also, Lloyds’ dividend yield of 4.6% a year is covered a chunky three times by earnings. And that’s why we might add to our Lloyds shareholding after 6 April (the new tax year). Lloyds may look like a value trap, but I like my odds.

4. NatWest

Last up is NatWest, formerly Royal Bank of Scotland. At 286.4p a share, this bank is valued at £27.7bn. Its shares are up 11.3% over one year.

Again, NatWest shares look inexpensive, but not quite as cheap as Barclays or Lloyds. They have a price-to-earnings ratio of 7.9 and an earnings yield of 12.7%. Meanwhile, their dividend yield of 4.8% a year is covered a healthy 2.6 times by earnings.

If I were forced to add some completely new bank shares to my collection, then I would choose NatWest over HSBC.

Finally, bank shares can be volatile, especially as the UK heads into recession. So owning these stocks might be painful over the next 12 months. But I’ll keep mine for their long-term dividend income and capital gains!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Cliff D’Arcy has an economic interest in Barclays and Lloyds Banking Group shares. HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, and Lloyds Banking Group Plc. 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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