UK bank shares are rebounding. So are they still cheap?

Bank shares dived on Monday morning, but then rebounded strongly over three days. After diving and then surging, are these popular stocks too cheap?

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The past week has been a rough ride for owners of bank shares. With Swiss giant Credit Suisse on the brink of failure, panicked selling sent share prices plunging. But as I explained last weekend, I’m not worried.

Ups and downs

Here’s how the UK’s Big Four banks’ shares have performed over three timescales:

BankShare priceOne-month changeOne-year changeFive-year change

Each stock has fallen by between roughly 5% and 16% in a month up to Wednesday’s close. On Monday morning, all four dived hard, before staging a comeback over three trading sessions.

For example, Barclays (LSE: BARC) shares hit a low of 128.12p in Monday’s plunge, while Lloyds Banking Group (LSE: LLOY) stock bottomed out at 46.65p that day. Yet all four stocks have bounced back from Monday’s lows.

Are these shares still cheap?

Before reviewing each stock’s fundamentals, here’s a quick guide to the Big Four banks (in A-Z order):

Barclays: the Blue Eagle bank is a major lender to British individuals and companies, but also operates an international investment bank.

HSBC Holdings (LSE: HSBA): this is a truly global mega-bank, with 39m customers across 62 countries.

Lloyds Banking Group: the Black Horse bank is the UK’s leading mortgage lender, with 26m customers and origins dating back almost 330 years.

NatWest Group (LSE: NWG): this is a leading mortgage lender and also a leading lender to small and medium-sized businesses.

Now for their share valuations:

BankMarket valuePrice-to-earnings ratioEarnings yieldDividend yieldDividend cover

While three of these banks have valuations of £22bn to £33bn, HSBC is a FTSE 100 super-heavyweight, with its market value exceeding £111bn.

Two things stand out from my second table. First, dividend yields at all four beat the FTSE 100’s cash yield of roughly 4% a year. Second, dividend cover — ranging from 2.2 times at HSBC to 4.1 times at Barclays — is solid.

Now for some bad news. These are trailing (historic figures) and I expect 2023’s earnings to be considerably lower than 2022’s. This would lower the stocks’ earnings yields and dividend cover. Even so, I expect these cash payouts to be fully paid or even raised this year.

I’d buy Barclays and Lloyds

Today, I’d gladly buy shares in Barclays and Lloyds. To me, both banks look undervalued, with Barclays stock looking very unwanted and unloved.

However, my wife and I already own both shares in our family portfolio. Also, we have almost 100% exposure to shares right now, with little spare cash for investing. So I shall bide my time before buying more.

Finally, a risk warning for all four bank stocks. With economic growth slowing, the UK could enter a recession this year. This would likely hit the revenues, earnings and cash flow of all four banks. Also, higher bad debts and loan losses would be negative for bank valuations. Nevertheless, I buy stocks for the long term and not simply for one year’s returns!

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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