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Investing in the Covid-19 era – I think bank shares are looking attractive

During the 2008 crash, banks saw their reputation sink so low that many wondered if it would ever recover. During the Covid-19 crisis they are not exactly regarded as saints, but they do seem to have been among the companies that have seen their image improve.  

The turnaround has been 12 years in the making, but I think that banks have finally won back the public’s trust – mostly. 

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But what about investing in banks? What about shares in HSBC Holdings or Lloyds Banking Group, for example? What about Barclays and Royal Bank of Scotland Group shares? Have they become more attractive too?

The share prices

Most of the banks have suffered especially acute falls in their share price this year.

The FTSE 100 has fallen by just over a quarter since the beginning of the year, but shares in Lloyds, on the other hand, have halved. It has been a similar story with Barclays  shares, while the RBS share price has more than halved — from 244p to 114p.  For HSBC shares it’s been tough but not quite so bad. Its shares have fallen by slightly less than a quarter.

At face value that feels almost ironic. Shares in the bank that is famous for its links with China has performed much more strongly than the more UK-centric banks. But if you look a little more carefully at HSBC shares compared with shares in Lloyds, Barclays, and RBS, you will see a slight difference in timing. The HSBC share price started to fall a little sooner and has seen a mild recovery, roughly coinciding with with signs that the Covid-19 virus was spreading less quickly in China.

Lower share price means higher dividends 

The recent falls in shares pertaining to the four banks has meant the yield has improved — assuming that dividends are maintained. The HSBC dividend yield is now just under 9%. Lloyds dividends are over 10%. RBS dividends are lower at just under 4%, but then the bank has only recently started paying dividends. The Barclays dividend yield sits roughly between the HSBC and Lloyds yield.

With interest rates so low, I would be tempted to say these yields are very attractive.

There is one big question mark hovering, however. Will dividends be maintained?

We just don’t know how weak the economy will be in the post-Covid-19 era. Suppose house prices crash. A significant part of Lloyds’ revenue is from mortgage lending, so how would falling house prices affect it?

Then there is the possibility of a debt bubble. If the economy falls into some kind of depression, might indebted households default in big numbers?

On the other hand, partly thanks to international regulations imposed to reduce banks’ vulnerability in the event of another financial crash, banks have much stronger balance sheets today compared to 2008.

I hate to tempt fate by saying this, but I think that the banks are highly unlikely to need a bailout this time around.

We will always need banks, and after certain teething problems, they have all learned how to adopt digital technology. I think that shares in HSBC, Lloyds, and Barclays are appealing, right now. As for RBS shares, I am not so sure — this crisis is not good timing.

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Michael Baxter has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Lloyds Banking Group. 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.