“My top banking stock is…”

Four Foolish contributors share the British banking stocks they rate most highly right now — including a double vote for one high-street mainstay.

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According to Janus Henderson’s Global Dividend Index, banking stocks were responsible for half of the world’s dividend growth in Q2. But many promise more than just income.

Barclays

What it does: Barclays is a UK retail bank, and also has an international investment banking business.

By Alan Oscroft. Bank valuations are the lowest they’ve been for a long time, so it’s a tricky choice.

But I’m going for Barclays (LSE:BARC), for a few key reasons.

Its forecast price-to-earnings (P/E) ratio is down under five right now. That’s even lower than Lloyds Banking Group, at six. And Lloyds had been my best-buy bank for a long while.

Barclays’ low share price has pushed up the 2023 dividend yield, now put at 5.9%.

I reckon fear for international banking is helping keep Barclays shares down, and that’s understandable. It is a risky part of the business, and failures this year have rocked the US banking world.

Banks are busy setting aside impairment cash to cope with possible bad debts as interest rates have soared. And that’s another source of risk.

But with a long-term view, I see the UK’s banks as cash cows. And Barclays looks like the most undervalued banking stock to me.

Alan Oscroft owns shares in Lloyds Banking Group

HSBC

What it does: HSBC is one of the largest banking and financial services organisations in the world.

By Andrew Mackie. For the first time since the global financial crisis of 2008, banking stocks are looking increasingly attractive investment propositions. Rising interest rates has been the catalyst for a surge in profits across the sector.

Despite this, the collapse of a number of banks earlier this year means that I am only interested in buying shares in large established companies with strong balance sheets.

Five candidates within the FTSE 100 meet these criteria. However, I believe HSBC (LSE:HSBA) to be the company best placed to navigate the present economic backdrop.

Over the past few years, it has been on a transformation journey repositioning its portfolio in order to maximise profit generation, instead of propping up loss-making businesses. In the first half of 2023, return on tangible equity, a key metric in the industry, jumped to 22.4%, up from 10.6% a year ago.

However, it’s more than just a traditional bank. For example, its wealth business is well placed to profit from the growing prosperity and living standards across Asia.

As profits shine, shareholders are being handsomely rewarded. This year, dividend payments are expected to increase by over £3.5bn, over three times the amount of any other FTSE constituent.

HSBC might possess a rock-solid balance sheet with assets totalling over $3trn, but circumstances can change very quickly. I remain concerned about the US Treasury market, to which it has significant exposure. If yields continue to rise on long-dated government debt, then another SVB banking crisis could be just around the corner.

Andrew Mackie owns shares in HSBC.

Lloyds

What it does: Lloyds is one of the largest retail and commercial banks in the UK, considered one of the “Big Four”.

By Dr James Fox. Lloyds (LSE:LLOY) is among the most unloved banking stocks on the FTSE 100. Once the darling of the index, the UK-focused institution trades at just six times earnings today.

It’s a strong cash-generating business, and due to its lack of an investment arm, it’s more interest rate sensitive than its peers.

With interest rates surging this year, we can expect to see a multi-year tailwind that should positively impact Lloyds’s revenue more than most.

Rising impairment charges as interest rates peak are a concern and are part of the reason Lloyds trades at such a depressed level today.

But in the medium term, we can expect BoE interest rates to moderate, closer to the sweet spot between 2-3%.

Obviously, as investors, we like diversified businesses. However, Lloyds’s UK mortgage-focused operations are performing well right now, and the windfall will likely be used as part of diversification efforts.

James Fox owns shares in Lloyds Bank

Lloyds 

What it does: Lloyds is a FTSE 100 stalwart, with its operations based in the UK.  

By Charlie Keough. There are a lot of investment opportunities in the banking sector given the recent volatility, but my pick of the stocks is Lloyds (LSE: LLOY). 

I most like the stock due to its attractive dividend yield. As I write, this sits at a sizeable 5.8%. And with it covered three times by earnings, it also seems safe. 

The bank posted some encouraging results for the first half of the year, including increases in pre-tax profit and net income. As such, it upgraded its guidance for the full year.  

With it recently announcing ambitious plans for the times ahead, including a £3bn investment over the next three years, I think the business is placing itself in good stead for long-term success.  

Aggressive rate hikes causing uncertainty surrounding the stability of the UK economy could see Lloyds suffer in the near term.  

However, hovering around the 44p mark, I see Lloyds as a winner.  

Charlie Keough owns shares in Lloyds.  

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.

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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