Investing in UK banking shares is an extremely risky business, I feel. I’ve recently explained why an economic hangover following Covid-19 and Brexit could damage profits at Lloyds in the short term. The threat of low interest rates could wreak havoc on the bottom line for much longer too.
Now, Barclays (LSE: BARC) has a couple of tricks up its sleeve that Lloyds doesn’t. It has considerable exposure to the US, a quality that will allow it to navigate a prolonged downturn in the UK much better than its rivals. The FTSE 100 bank also has an investment bank that could help group profits recover strongly during the inevitable bull market.
UK banking shares to book big losses
That’s not to say I’d buy Barclays. The risks posed by Covid-19 alone to UK shares like these are colossal, as a recent report from McKinsey & Company illustrates. The consultancy reckons that, “the pandemic will present a two-stage problem for banks… First will come severe credit losses, likely through late 2021, [then] amid a muted global recovery, banks will face a profound challenge to ongoing operations that may persist beyond 2024.”
McKinsey estimates that $3.7trn of lost revenue will be endured by the world’s banks between 2020 and 2024. This is “the equivalent of more than a half year of industry revenues that will never come back,” it says. But beware, as it reckons the final bill could be even bigger. Under its worst-case scenario, the consultancy predicts lost revenues of $4.7trn.
What’s more, McKinsey believes banks will make a jaw-dropping $2.7trn worth of loan-loss provisions over the next four years. Barclays has set aside £4.3bn of Covid-19-related credit impairment charges already. The costs to UK banking shares are likely to keep stacking up.
Dividend yields in danger?
Barclays clearly isn’t without risk. But fans of the bank would argue that its troubles are baked in at current share prices. The FTSE 100 firm trades on an ultra-low forward price-to-earnings (P/E) ratio of 11 times. This is built on City forecasts suggesting that annual profits will rocket 74% in 2021.
This figure isn’t enough to tempt me to invest though. And neither is Barclays’ inflation-mashing dividend yield of 3.5% for next year.
This month the Prudential Regulatory Authority lifted the temporary ban on bank dividends imposed back in the spring. It said that “banks remain well capitalised and are expected to be able to continue to support the real economy through this period of disruption.” Barclays and its peers it could end up disappointing those expecting chunky dividends, however. A steady build in bad loans and sagging revenues growth are one problem. Balance sheet protection as the global and domestic economies recover from Covid-19 is another.
I’m not risking my hard-earned cash with Barclays or Lloyds. There are many other cheap UK shares I’d rather buy in my ISA for 2021. And The Motley Fool can help you to discover them today and make a fortune during the new bull market.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays 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.