The banking crisis has triggered a sell-off in the sector. With share prices down sharply, I’m thinking about buying some bank shares for my Stocks and Shares ISA before the 5 April deadline.
Of course, investing in shares while the situation remains uncertain carries some extra risk. Things could get worse and problems could spread.
Although I think the combination of issues that affected Silicon Valley Bank — owned by SVB Financial — are unlikely to affect UK-regulated banks, I can’t be sure that nothing else will go wrong.
However, there have been no reports of problems at any UK banks, so far. On balance, I’m happy to consider investing if I can find a good opportunity.
What banks are on my radar?
UK has a number of smaller, specialist banks, but today I’m only looking at the big FTSE 100 lenders:
- Lloyds Banking Group
- NatWest Group
- Barclays
- HSBC Holdings
- Standard Chartered
Why not smaller banks? I think that some of them could be attractive investments at current levels. However, recent events in the US suggest to me that smaller and more specialist lenders might be more risky than larger banks at the moment.
My approach is to play safe, if I’m in doubt. The biggest banks are the most closely-watched by regulators. After reviewing their 2022 results, I’m confident they’re in good health and are performing well.
Are bank shares really cheap?
I think it’s important to be realistic about how banks are likely to perform as an investment. They’re cyclical businesses. In a recession, profits can plunge as bad debts rise and lending shrinks.
Even if we avoid a recession in the UK, growth is expected to be pretty minimal in 2023 and 2024. Broker forecasts for the UK banks reflect this.
Although the outlook is stronger for Asia-focused HSBC and Standard Chartered, I think they still face risks in China.
All of this means that when I buy bank shares, I want them to be cheap. I’ll then hope to benefit from high dividend yields and, ideally, some capital gains (tax-free in an ISA) when market conditions improve.
The good news is that I think the FTSE 100 banks probably all are fairly cheap right now:
- All the banks listed above are trading below their book value
- Except for Standard Chartered, they all offer dividend yields of 6%, or more
- They’re all trading on forecast price-to-earnings ratios of six, or less
- Broker forecasts suggest a stable outlook for profits
What I’d buy now
I’d be quite comfortable holding any of the FTSE 100 banks I’ve listed.
From the UK-focused banks, I’d choose Lloyds or NatWest. Right now, I can’t see much difference between them, except the latter’s forecast dividend yield of 6.9% is higher than Lloyds’ (5.9%).
Of the two emerging markets banks, I’d probably choose Standard Chartered over HSBC, because I think it has stronger growth prospects.
Whatever I decided, I’d certainly want to top up my ISA before the end of the tax year, if I could. The tax-free benefits I get from this account are too good for me to waste.
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