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The best UK bank shares to buy now

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UK bank shares have come storming back in 2021. And investors who bought during the slump will have done well. But will the recovery keep going, and which are the best banks to buy now?

Checking back to mid-February, just before the crash kicked in, I’m surprised to see that Barclays shares are up 4% since then. Through such a dreadful period, I find that astonishing. And my Lloyds Banking Group shares, which crashed more than 55% at one point, have recovered to a far less painful 17% loss. HSBC Holdings, with its very different focus, is the poorest performer of these three, down 22% over the 15 months.

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I’ve liked UK bank shares for a long time (to my cost in recent years, admittedly). And I can’t help thinking we face attractive buying possibilities right now, even after the 2021 recovery. I see several different approaches, each with different merits.

The first is Lloyds, which is very much a changed bank since I bought my shares. Following the banking crisis, and then Brexit, Lloyds is now a UK-focused retail operation. That means two key things to me, one positive and one negative. On the upside, Lloyds is much better insulated from global banking shocks now, and is no longer involved in the high-stakes, high-risk, investment banking business.

UK bank shares diversity

So for those looking for UK bank shares, Lloyds is very much a UK bank. But the downside of that is 100% dependency on, and exposure to, the UK economy. Investors don’t get the safety through geographic diversification that comes with shares in international companies.

The news might be full of predictions of big UK economic growth in 2021, but that’s after the hammering of 2020. Our longer term, post-Brexit, economy is still far from certain.

Barclays took a different approach to the twin financial threats, and has retained its international outlook. It’s still big in investment banking too, and investors had hoped the big profit hikes being enjoyed by US banks would rub off.

Sadly, first-quarter results didn’t impress, with revenue dipping 6%. The Barclays share price quickly shook off the disappointment, but there’s clearly some risk attached to buying at today’s relatively high prices.

I do have it on my watchlist, though, as I see Barclays as a leader among UK bank shares. I’ll wait until I see what half-time results look like.

Wider geographic exposure

For a very different geographic focus, HSBC looks like a decent candidate to me. But it’s not without its problems. It’s tied closely to the Chinese economy, which looks like a good thing while that’s booming.

But while the rest of the UK banks might be much slimmed down now, HSBC has, for years, been looking a bit bloated. Work on restructuring and cost savings was impacted by the pandemic, but it should hopefully continue. HSBC does face uncertainty on the China and Hong Kong political front, mind.

I reckon these three banks could further attract the bulls when their dividends get back in full swing. In fact, I think a good bit of the recent resurgence is probably down to improving dividend prospects. I’m seeing all three as long-term buys among UK bank shares.

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Alan Oscroft owns shares of Lloyds Banking Group. 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.

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