The big FTSE 100 banks have had a brilliant few years. I only hold one, wanted to buy more, but feared the sector was looking a little toppy. Do we suddenly have a buying opportunity? I think so, and I’m putting my money where my mouth is.
3 reasons why I like FTSE 100 banks today
- They’re making big money. None more so than Asia-focused HSBC Holdings. It made a massive $32.3bn profit in 2024, and while that dipped to $29.9bn last year, it’s still an awful lot.
- Shareholders are being rewarded. UK banks are generating plenty of cash, with the big five returning more than £31bn in dividends and £14.1bn in share buybacks in 2025 alone.
- They still look good value. Despite their strong share price growth, FTSE 100 banks boast low forward price-to-earnings (P/E) ratios. Barclays has a forward P/E of around 8.6, well below today’s FTSE 100 average of 14.5.
3 reasons why they worry me
- The world’s on edge. The rising oil price risks pulling us into a global recession. The banks won’t escape the fallout, hitting demand for loans and driving up debt impairments.
- Shadow banking threat. HSBC and Barclays have taken big hits from their exposure to London-based shadow bank Market Financial Solutions, which collapsed in February amid allegations of fraud. HSBC lost £295m, Barclays £228m. There could be more shadowy threats out there.
- Interest rate risk. Banks do well when interest rates rise, because this allows them to widen their margins. Rates looks set to rise again as inflation returns, but when the cycle turns, profits will shrink.
There are always short-term risks. But I’m looking to build a portfolio of dividend growth stocks for retirement. Any stock I buy today, I hope to hold for at least 20 or 30 years. Today’s low P/Es offer another safety net.
Here’s why I bought NatWest shares
I already hold Lloyds, so that was off my shopping list on diversification grounds. I was tempted by Barclays, but worried about its shadow banking exposure. Then last Friday (1 May), NatWest (LSE: NWG) shares plunged almost 4.5%, and I swooped.
NatWest posted a 12% increase in Q1 profits and raised 2026 income guidance, but that wasn’t enough. Markets had hoped for more, and feared revenue growth might prove shaky. They were also spooked by a potential £140m impairment charge, due to Iran. I dismissed those as short-term issues, and pounced. Frankly, how could I resist?
I was bagging a top bank with a dirt cheap forward P/E of just 7.7. Following the one-day dip, the forecast yield had climbed to 6.57%. That’s expected to hit 7.39% next year. It’s a stunning rate of income, if not guaranteed.
My biggest concern is that NatWest has a very similar risk profile to Lloyds. Both are heavily exposed to the UK economy, which isn’t exactly thriving. Yesterday (5 May) I balanced that by buying another cut-price FTSE 100 bank, this time one with global exposure. Under The Motley Fool trading rules I can’t say what it is for a couple more days. But I think it’s just as exciting as NatWest.
