Barclays (LSE: BARC) shares have smashed it lately, rising 68% in the last year and a thunderous 228% over five, firmly consigning the financial crisis to history.
It’s not the only FTSE 100 bank flying. Lloyds Banking Group is up 75% over the last year and 180% over five. NatWest Group has climbed a relatively modest 52% over 12 months, but is top dog over five years after soaring 283%.
FTSE 100 star sector
I’m sorry, but isn’t this a bit crazy? These are big banks, not whizzy penny stocks. They shouldn’t be allowed to rise like this, should they? Yet here we are, putting the idea that UK blue-chips are soggy firmly to bed.
It’s clearly a sector thing. Asia-focused FTSE 100 banks HSBC Holdings and Standard Chartered show eerily similar one- and five-year returns. Makes me wonder if investors are looking at the companies themselves or just chasing the entire sector upwards. I suspect the latter.
Higher inflation and interest rates have helped. This is a boon for all the banks, allowing them to widen net interest margins, the difference between what they charge borrowers and pay savers, and a key measure of profitability.
However, the US Federal Reserve cut rates last Wednesday (10 December), and the Bank of England is expected to follow suit on Thursday (18 December). A couple more cuts are on the table for 2026 too. Nobody expects a return to near-zero rates, but this will still squeeze margins and profits.
Lower rates do have a silver lining. They should help to revive economic activity and housing markets, driving demand for business and personal loans and mortgages. So let’s not feel too sorry for those poor banks. Especially since they got off lightly in last month’s Budget, when the Chancellor decided against hitting them with another windfall tax.
Buybacks and dividend yields
Despite their strong run, valuations aren’t crazy. Barclays has a price-to-earnings (P/E) ratio of 12.4, with NatWest even cheaper at 11.8. Lloyds is the priciest of the three with a P/E of 15. However, they were roughly half that a year or two back. So that’s a warning shot.
Inevitably, their yields are lower than before the rally. NatWest has a trading yield of 3.46%, followed by Lloyds at 3.34%, and Barclays with a relatively stingy 1.87%. To be fair to Barclays, it plans to mostly reward investors through share buybacks. It duly surprised investors in October with £500m of repurchases, despite posting Q3 profits down 7% to £2bn. That fall was mostly down to a £325m impairment for the motor finance scandal (which hit Lloyds harder).
Barclays is still on track to deliver its best ever year for pre-tax income, beating £8.4bn in 2021, according to AJ Bell. NatWest is also doing nicely, reported its strongest quarterly profit in more than a decade in October, and lifting guidance for the year.
The banks will have to go some to maintain this momentum next year. However, I still think they’re worth considering with a long-term view. If there’s a wider market crash, say if the AI bubble bursts, they will inevitably take a hit. All things being equal, I’d see that as a buying opportunity.
