London is called the world’s financial capital, and for a good reason. The City of London has been the epicentre of trade and commerce in Europe since the 16th century. As businesses in the region matured, the London Stock Exchange drew investments from across the globe, further strengthening the financial companies listed in the UK.
Today, financial institutions are a major driver behind the UK economy. In 2020 alone, the financial services sector contributed £164.8bn to the UK economy. This was nearly 9% of the total economic output that year.
What are finance stocks?
The finance sector encapsulates a range of companies that offer banking services, asset management, insurance, mortgages, accounting services, and credit/debit card facilities. It could also include companies that provide online financial services like global money transfers, currency exchanges, trading platforms, and brokerages.
Most top finance shares come with hefty dividends and have historically offered steady growth.
Top financial stocks in the UK
Here are some of the top UK financial stocks with the highest market capitalisation. These companies are industry leaders and will give new investors a fair idea of the types of listed finance companies there are. They’re a great starting point for personal research and to figure out if finance stocks are the right pick for your portfolio.
|HSBC Holdings (LSE:HSBA)||Global banking giant with the highest asset value under management in Europe.|
|Lloyds Banking Group (LSE:LLOY)||The biggest mortgage lender in the UK with a focus on the housing market.|
|Prudential (LSE:PRU)||UK insurer with a huge presence in Asia, managing US$247.8bn in the growing market.|
|Barclays (LSE:BARC)||British banking behemoth with a focus on retail and investment banking.|
|NatWest Group (LSE:NWG)||Partially owned by the UK government, this bank operates a range of brands that provide financial services.|
1. HSBC Holdings
This British firm is a fast-expanding, global force in the banking world. It operates in over 60 countries with over 40m registered customers. HSBC Holdings manages and holds over $15trn in assets and was the world’s sixth-largest bank by total assets and market capitalisation in 2020.
Established in Hong Kong in 1866, the bank expanded fast in Europe and switched headquarters to London in 1991. But, over the last few decades, Asia and the Middle East witnessed a huge economic boom. And HSBC has now switched its focus back to these regions, to target these booming economies. The banking group is expected to undergo a major restructure in the coming years to split its management of Asian operations to improve strategic focus in the region.
Historically, the banker has maintained a steady cash flow and is well placed to sustain and grow the current dividend yield for the foreseeable future. As an investor, it is worth noting that this finance stock is consistently ranked in the top 5 most valuable banking companies in the world and has cemented its status as a global market mover.
2. Lloyds Banking Group
The black horse bank is a torchbearer for the British banking sector and has been a leading UK finance stock since 1865. Lloyds Banking has a rich history and is one of the most recognised finance brands in the country.
Currently, the bank is the leading mortgage lender in the UK and has acquired a growing interest in the real estate sector. Partnering with Barratt Developments, one of the largest property development companies in the UK, the banker has lofty ambitions of acquiring 50,000 plots by 2030.
Even though analysts predict a slowdown in the housing market, the move is seen as a potential cash cow and could make the banker a top real estate developer in the country. The Office of National Statistics estimates that the UK population could hit 71m by 2045. This growth is a strong positive for this financial company’s future revenue.
Insurance giant Prudential is another company on this list with a huge and expanding Asian presence. In 2021, the group offloaded its operations in the US and chose to focus solely on emerging markets in Africa and Asia. Given the low insurance penetration in these regions and the growing earning potential of the population, the board expects the demand for insurance services to explode.
Even in developed countries like Mainland China, the estimated life insurance penetration stands at just 2.3%. Other densely populated, developing countries like Indonesia, Singapore, India and Malaysia have an insurance penetration rate of 1.4%, 7.6%, 3.2% and 4% respectively. This gives Prudential a large target customer and asset base. And Prudential is already among the top three insurance providers in all these regions.
This strategy could prove fruitful for this finance stock if the company manages to market its product effectively.
This banking group established in the 1800s has grown to become one of the most recognised finance brands in the world. Barclays offers personal and corporate banking services, consumer lending, cards, financial advice, and risk management services.
The bank has a strong digital presence with over 10m registered users on its app and over 3bn logins. The group also recently adopted a ‘Buy Now, Pay Later’ program that allows customers to pay for goods in smaller instalments or defer payments. The bank has partnered with e-commerce giant Amazon to roll out staggered payments for orders over £100. This could bring in a lot of younger customers to the bank, maximising long-term customer relationships.
The innovation-first strategy could give this finance stock a big boost over the long term as more young consumers look for easy banking solutions.
5. NatWest Group
Another traditional banker with a strong digital presence, NatWest Group (LSE: NWG) is a streamlined cash machine with a strong dividend yield. As the largest business bank in the UK, Natwest has 19m registered customers ranging from small businesses to large multinational corporations.
The group used the pandemic downtime to restructure the business to improve profit margins. This allowed the company to hit its cost reduction targets, cutting 4% of its operational costs. NatWest also has a robust shareholder returns policy, rolling out a £3.8bn payback. The financial company also announced a minimum of £1bn in dividends each year to 2023 given strong projected cash flows.
For the environmentally-conscious investors, NatWest is looking to provide £100bn of climate and sustainable funding and financing to businesses by 2025.
While investing in stable companies with a steady cash flow is an attractive option, finance stocks may not be for everyone. There are risks to consider, especially in a turbulent economic climate.
When an economy is struggling with inflation, interest rate hikes are a common reaction from central banks. This could put people off borrowing, which would affect most financial stocks.
But an interest rate hike also means banking shares earn more with small or no decrease in margins. And traditionally, finance stocks have been excellent portfolio builders because of the higher-than-average dividends and high trading volume of stocks in the sector.
Positive shareholder interest over time leads to substantial share price increases. And both in the UK and overseas, large banking and finance stocks have traditionally been great long-term wealth generators. And a progressive investment plan and smartly reinvesting dividends could be a great way to maximise long-term gains in the market, especially with dividend-heavy finance shares.
Although there are no guaranteed gains, here at The Motley Fool, we preach a long-term investment strategy and encourage readers to do their own research before investing. And finance stocks are great indicators of the larger economic climate.
If you think UK finance stocks are the right fit for your portfolio, this is a great starting point to evaluate what companies in the financial sector have to offer investors today.