Have I been handed a massive opportunity to buy cut-price FTSE 100 banks before this year’s Stocks and Shares ISA deadline? It looks like it.
The banking crisis started in the US and has spread to Europe, with Germany’s Deutsche Bank now in the firing line. UK banks aren’t immune, with Barclays, Lloyds Banking Group, NatWest and HSBC Holdings all sliding yesterday.
Crisis is also an opportunity
Barclays shares are down 18% this year, but NatWest has only fallen a modest 4.21%, with Lloyds slipping 4.18% and HSBC up fractionally at 0.07%. The sell-off isn’t as big as the lurid headlines would suggest.
No major problems have emerged with UK banks yet. The Bank of England stamped down on excessive risk-taking after the financial crisis and introduced rigorous stress testing. So far its efforts seem to be paying off, but there is always the danger that hidden nasties emerge.
Lloyds looks shielded from contagion by its domestic focus. As the UK’s biggest mortgage lender, it may take a hit if house prices crash, but that’s a different concern. It boasts a solid 15.1% Common Equity Tier 1 (CET1) ratio, which measures a bank’s capital against its assets.
NatWest is another UK-focused operator, although given our many economic troubles, that’s not wholly reassuring. Again, it offers protection against overseas woes, and has has a robust CET1 ratio of 14.2%.
Asia-focused HSBC looks solid for a different reason. It is a huge international bank that Bank of America analysts reckon is “built for times like these”, with $327bn of cash on hand and $184bn of short-dated securities. Hence its share price stability in this troubled year.
HSBC’s CET1 ratio is lowest of the three at 13.6% last August, down from 15.8% at the start of year. Nobody seems worried.
Barclays has been hit hardest because of its investment banking operations. It has also fallen foul of US regulators on a string of occasions, incurring a $361m fine for breaching limits on complex financial product sales as recently as September.
FTSE banking stocks look great value
Barclays has a strong capital base and a CET1 ratio of 13.1%. But after this year’s sell-off, it’s the cheapest of the big four banks, and the most exciting opportunity, in my view. It has a rock bottom price-to-earnings (P/E) valuation of just 4.1 and a lowly price-to-book (PTB) value of 0.3. The forecast yield is a juicy 6.4%, covered 3.7 times by earnings.
Lloyds is only slightly pricier with a P/E of 6.3 and PTB of 0.6. Its forecast yield is 6.2%. NatWest is valued at 7.35 times earnings, but has a higher PTB ratio of 0.86%. It yields 5.33%.
HSBC has a P/E of 8.7 and PTB of 0.7, while yielding 4.9%. My concern with HSBC is that it risks being caught up in the widening rift between China and the West. Since its stock hasn’t fallen this year, it also feels like less of an opportunity.
Lloyds offers a better entry price and yield than NatWest, but I already own it. Barclays looks like the biggest opportunity and if I’ve got any cash left over, I’ll take a stake in NatWest too.
It’s a risky time to buy, no question about it, but I may not see another chance like this one any time soon.
