After a sharp drop, UK bank stocks have just started to recover over the last couple of days. But shares in Barclays are still 17% lower than they were a month ago and Lloyds Banking Group is down 8%.
I think the recovery for bank shares is likely to take some time. But I see this as a positive for investors.
Crisis
When bank shares are in the spotlight, it’s usually not a great sign. And that’s been the case as customer confidence in banks has been wavering lately, causing investor confidence to falter, too.
A fortnight ago, two US banks went under, sending shockwaves through the global banking sector. And worse was to follow when Credit Suisse – a bank subject to Basel III regulations – had to be saved by UBS.
While no two banks are identical, these events sent shares in FTSE 100 banks falling. So far, though, there hasn’t been a bank failure in the UK as a result of the latest crisis.
Despite central banks doing their best to maintain order, Investors seem wary. And I think this caution is likely to prove durable.
Recovery
What shares will do in future has a lot to do with investor sentiment. While this can be difficult to predict, I think there are some clues about what the recovery might look like.
First, investors don’t seem convinced by attempts at maintaining confidence in banks. Authorities in the US, Europe, and the UK have acted decisively, but their efforts have had a limited effect on share prices.
This makes it hard to see what sort of news, announcement, or development might cause stocks to jump back to where they were. The market seems to want to see stability first, then buy into it.
Second, it looks to me like what is needed is a period of steady performance from banks. If they can manage this, then I think bank stocks will start to look cheap and begin to attract attention.
This isn’t going to happen overnight. But there are a couple of reasons why a sustained period of lower prices might be a good thing for investors with a long-term focus.
Buying bank shares
Obviously, one advantage of lower prices is that it gives investors better opportunities when it comes to buying shares. But there’s another reason shareholders benefit from prices staying down.
UK banks are some of the most active FTSE 100 constituents when it comes to repurchasing their own stock. Lloyds spent £2bn on buybacks in 2022 and Barclays has deployed around £18bn since 2020.
Buybacks provide value to shareholders by reducing the number of shares outstanding. When share prices are higher, buybacks don’t bring down the overall share count by as much.
In other words, investors gain more from share repurchases when prices are lower. So a prolonged downturn in bank stocks is good for investors from that perspective, too.
Overall, I think the current situation – and especially the case of Credit Suisse – demonstrates there is real risk to investing in banks. But for investors that know what they’re doing, this could be a great opportunity.
