These FTSE 100 banks appear massively undervalued! Are they?

FTSE 100 banks trade at a discount to their American peers. That’s pretty clear. But are these markdowns warranted? Dr James Fox explores.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Standard Chartered plc

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Banks are well represented on the FTSE 100. We have Barclays, HSBC, Lloyds, NatWest and Standard Chartered. These remain some of the biggest financial institutions in the world, but British banking industry market-cap is a fraction of the size it was prior to the financial crash.

Today, UK-listed banks tend to change hands with much cheaper valuation metrics than their US-listed peers. This isn’t unusual as the latter stocks tend to trade at a premium. But there are few places this premium is as large as the financial sector.

Undervalued on earnings

One of the most common valuation barometers is the price-to-earnings (P/E) metric. This is a financial ratio that compares a company’s current stock price to its earnings per share (EPS).

Investors and analysts use the P/E ratio as a tool to assess the relative value of a company’s stock. Higher ratios suggest a company is more expensive, and lower valuations suggest a company is cheaper.

Here’s how FTSE 100 banks compare with their US counterparts. As we can see, all five UK-listed banks trade at a substantial discount to these three chosen US-listed banks. This infers that UK banks are better value.

P/E Forward
Barclays6.1
HSBC5.7
Lloyds5.8
NatWest4.6
Standard Chartered6
Bank of America8.2
Goldman Sachs13.9
JP Morgan8.8

Undervalued versus book value

Another useful metric is the price-to-book (P/B) valuation. This ratio compares a company’s current market price per share to its book value per share.

The P/B ratio is particularly valuable for investors who focus on the company’s balance sheet and asset base. A P/B ratio below one may suggest the stock is trading at a discount to its book value, indicating a potential undervaluation.

Here’s how FTSE 100 banks compare with their US counterparts on the P/B ratio. Once again, there’s a clear trend suggesting US banks are more expensive than their UK peers.

P/B
Barclays0.37
HSBC0.86
Lloyds0.55
NatWest0.49
Standard Chartered0.51
Bank of America0.85
Goldman Sachs1.06
JP Morgan1.46

What about prospects?

Of course, stocks are also valued on their expected performance in the coming years, not just the year ahead or their asset values.

After all, a higher P/E often means investors expect more growth from the stock in question.

In the UK, analysts have registered their concerns about the impact of a severe economic downturn on credit defaults. This is undoubtedly weighing on the share prices of UK-focused banks like Barclays and Lloyds, even as these concerns become less worrisome.

While there are plenty of considerations, a useful metric which takes into account a company’s prospects and growth is the PEG ratio. This factors in both the P/E ratio and the expected earnings growth rate of a company.

The PEG ratio helps investors assess whether a stock is fairly valued, overvalued, or undervalued, based on its earnings growth expectations.

A PEG ratio below one may indicate that the stock is undervalued, considering its growth potential.

PEG Forward
Barclays1.22
HSBC0.57
Lloyds0.48
NatWest0.44
Standard Chartered0.83
Bank of America1.44
Goldman Sachs1.72
JP Morgan1.76

Once again, the data suggests US companies are more expensive than their British peers. This is the type of data that informs my investment decisions.

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.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. James Fox has positions in Barclays Plc, Lloyds Banking Group Plc, NatWest Group, and Standard Chartered Plc. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, Lloyds Banking Group Plc, and Standard Chartered 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.

More on Investing Articles

Investing For Beginners

How to try and build a £250k Stocks and Shares ISA from scratch, starting in 2024

With a regular savings plan and a smart investment strategy, it’s possible to build wealth within a Stocks and Shares…

Read more »

Investing Articles

I’m considering 3 top UK dividend stocks for my portfolio this July

Mark David Hartley is looking at adding a few dividend stocks to his portfolio this month. Will these three shares…

Read more »

Investing Articles

3 FTSE 100 shares I’d buy to create lasting passive income

Dividend stocks are a great way to build an additional income. Our writer details three FTSE 100 picks she’d love…

Read more »

Investing Articles

After falling 9% in 6 weeks, is this FTSE 100 stock now in bargain territory?

The BAE Systems share price hit a 52-week high on 3 June. Six weeks later, it’s down nearly 10%. Is…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

I love the look of Entain shares, potentially 47% undervalued

Many FTSE 100 companies have been on a tear in 2024, but with Entain shares down nearly 50%, I think…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Could Aviva shares reach £5.84 in the next 12 months?

Some analysts think Aviva shares could soar nearly 19% in the next year. This Fool takes a closer look to…

Read more »

Investing Articles

I’m looking at a once-in-a-decade chance to buy dirt-cheap FTSE dividend shares

Harvey Jones says FTSE 100 dividend shares have been showing signs of life lately but they're still cheap and there's…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

If I’d put £10k in BAE Systems shares 10 years ago, here’s what I’d have now

BAE Systems shares have been on fire over the last decade. But just how much would a £10k investment back…

Read more »