This may be a once-in-a-decade chance to buy dirt cheap FTSE 100 banking stocks

FTSE 100 banking stocks have been cheap for years but now they’re starting to grow while paying out lots of cash for income too. Harvey Jones approves.

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The last 15 years have been hellishly tough for FTSE 100 banking stocks like Barclays, Lloyds Banking Group and NatWest Group.

They were hammered by the 2008 financial crisis and rightly so. Many people still haven’t forgiven the ‘greedy banksters’, as they still call them. Investors have had little joy since then, as the high street banks lurched from one controversy to another. They also took an age to restore their dividends.

Lately, bank stocks have been super cheap while offering ever higher yields. I think we’ve been staring at a buying opportunity for months. It may not last much longer.

UK recovery play

So I was interested to see a report by Hargreaves Lansdown equity analyst Matt Britzman, examining UK banking prospects after a strong round of Q1 results put “a spring in their step”.

He said default rates remain surprisingly low as borrowers show “impressive resilience” in the face of rising interest rates and the cost-of-living crisis.

Interest rates seem likely to stay ‘higher for longer’ than markets expected at the start of the year, and that may boost the banks, too. It would help them maintain net interest margins, the difference between what they pay savers and charge borrowers.

Britzman also said the banks should benefit from the improving UK economic outlook, as wages rise and the housing market recovers. “Domestic-focused names like Lloyds and NatWest, seen as UK economic bellwethers, look best placed to benefit,” he says.

Finally, UK banks have strong capital levels, which Britzman sees as a key attraction for investors. With luck, we can “expect some hefty dividends and buybacks over the medium term”.

Fun with financials

I share his optimism. Last year I bought a heap of shares in Lloyds because I found them too cheap to resist. As was the forecast 6% dividend yield. They’re up 20% over 12 months. Personally, I’m up got 25% and looking forward to receiving my next dividend on 21 May.

I’m tempted to buy more Lloyds shares but I’ll probably buy NatWest Group (LSE: NWG) instead. For the sake of variety and diversification. NatWest’s shares are also flying, up 24% over one year. Yet they still don’t look too pricey, trading at 8.36 times forecast earnings.

NatWest is expected to yield a 5.04% in 2024, which may climb to 5.36% in 2025. Investors are getting plenty of income and growth, right now.

My biggest concern is that I’m arriving late to the party. The NatWest share price has rocketed 55% in the last three months. I don’t want to be last man in.

Yet I’m hopeful of more to come. The last remaining cloud from the financial crisis will lift when the government sells off its remaining holding in NatWest, possibly in a blaze of publicity as it targets retail investors. On 22 March the government reduced its NatWest shareholding below 30%, and is no longer a controlling shareholder. That may have added fuel to the recent share price surge, by ending lingering fears of state intervention.

Any retail offering is likely to include discounts, but I’m not sure it’s worth waiting for those with NatWest going gangbusters today. I’ll buy it the moment I have the cash.

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.

Harvey Jones has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Barclays Plc 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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