2 income stocks investors should buy in the banking sector!

Dr James Fox details two bank income stocks he thinks investors should be buying for steady growth and attractive dividend yields.

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Income stocks are well represented within my portfolio, and so are banks. These stocks provide me with a regular return in the form of dividends, although these payments are by no means guaranteed.

This also reflects a more general preference to invest in established companies that, in theory, present less risk than investing in growth stocks. After all, new companies often fail, or cannot deliver their promised growth.

So here are two banking stocks I think investors should be piling into.

Lloyds

Lloyds (LSE:LLOY) is my top banking pick. It’s inexpensive, trading with a price-to-earnings (P/E) ratio of seven — that’s half the index average — and there are several near- and long-term catalysts for growth.

The bank will likely receive a boost from the news this week that the UK and EU have struck a new Brexit deal. This, if it gets through parliament, should benefit Lloyds more than other banks.

That’s because 100% of Lloyds’ sales come in the UK, but the commercial loans business has been decimated since Brexit. Broader market commentary suggests the UK will be a much more attractive place for investment and business once Brexit has been finally put to bed — this should provide a boost to the commercial loans business.

In February’s full-year report, we also saw that higher interest rates were having a material impact on revenue generation. In 2022, net income rose 14% to £18bn, but higher impairment charges — £1.5bn — meant profits remained flat year on year.

However, I think we’re seeing increasing evidence this interest rate tailwind will continue for longer than many anticipated. And that’s because inflation is proving very sticky, and economic activity is proving resilient, despite higher rates and a cost-of-living crisis.

Lloyds’ lack of diversification — it’s very focused on the UK mortgage market — might be a concern for some. But I also see it as a steady, perhaps slightly boring stock, that trades far below its fair value — discounted cash flow models suggest it’s undervalued by around 55%. That’s why I’m still buying more as the price pushes upwards.

It also has a forward yield around 5.2%.

HSBC

HSBC (LSE:HSBA) recently reported that quarterly profits almost doubled, driven by the rise in global interest rates, and unveiled a special dividend. The share price surged.

But even after this surge, I’d still buy more. Like Lloyds, higher interest rates are playing a major role in revenue generation. Net interest income surged.

However, full-year profit fell from $18.9bn to $17.5bn, largely due to a $2.4bn charge on the sale of its retail banking operations in France.

Looking forward, the high interest environment looks likely to be sustained and economic forecasts are improving in the UK and East Asia — where the majority of its income comes from. The Chinese economy is set to grow by 5.2% in 2023.

HSBC has been under pressure from shareholder Ping An to split the Asia business from its slower growing European and US businesses, and that could be a concern for shareholders.

However, the broad consensus is positive and I’d buy more of this stock for growth and the 4.3% dividend yield.

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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. James Fox has positions in HSBC Holdings and Lloyds Banking Group Plc. The Motley Fool UK has recommended 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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