Top FTSE 100 banking stocks including Barclays (LSE:BARC) and HSBC have lost around 10% of their value since 9 March. It was on the cards following the high-profile failure of US-based, Silicon Valley Bank. This wasn’t the only bank to hit the skids recently, as Silvergate Capital and Signature Bank have also joined the party. It may not be the last. First Republic Bank was similarly teetering until its rescue by a group of larger banks.
Encouragingly, I don’t think this is a systemic catastrophe-in-waiting like the last financial crises. Central banks are acting swiftly and the risk of market contagion for UK lenders is low. Certainly, I don’t foresee a run on the major banks that was commonplace during the 2008/09 financial crisis.
So, maybe the panic around the global banking sector over the last week or so has provided an inviting entry point for me.
Attractive FTSE 100 banks
As Warren Buffett once said, “we simply attempt to be fearful when others are greedy and to be greedy when others are fearful.” I’d like to invoke this approach within the UK banking sector.
Unlike their US counterparts, UK banks aren’t as heavily exposed to risk-weighted assets. So, the likelihood of a liquidity crisis stemming from a bank run is small.
I find Barclays the most attractive stock because of it’s bigger discount relative to peers. The poor performance of its shares across 2022 has made its valuation look like a bargain. The shares are the cheapest of the lot (a P/E of 5 versus the FTSE 100 P/E of 14). In fact, it’s one of the cheapest blue-chip banking stocks listed on the London Stock Exchange.
On the flipside, bond sensitivity to interest rate rises is what got these US banks into deep water. Recent events could well cause central bankers to reconsider further rate hikes. This isn’t the best news for banks. I’ll certainly be monitoring for the Bank of England’s MPC interest rate decision later this week.
Additionally, Barclays international banking exposure poses a risk, relative to a more domestic operator like Lloyds Banking Group. In this sense I can understand why some investors dumped the stock. But in my opinion this sell-off was overdone.
Too big to fail?
The crux of the matter is that safe-haven banks are often seen by regulators as too big to fail. Silicon Valley Bank was too big to fail, Credit Suisse was too big to fail. And guess what, they have both been bailed out.
In this vein, institutions like Barclays, Lloyds, and HSBC are all too big to fail. I like Barclays the most because it is the cheapest of the lot, and one of the most oversold following the market panic.
This mini-banking crisis reminded me of how safe systemically important banking institutions remain. A stock like Barclays is a strong long-term option for a defensive portfolio like mine.
The next few weeks will be critical in determining sentiment toward the global banking sector. A lot can still change, and sentiment could deteriorate even further. Barclays shares could get cheaper still — I am aware the shares have recently rallied.
I’ll keep my powder dry in the hope the discount opportunity widens on the stock. If it does, I’ll take my chance be greedy with some Barclays shares.
