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Have I been given a great opportunity to buy at a reduced price? FTSE 100 before this year’s Stocks and Stocks ISA deadline? It seems that it is so.
The banking crisis started in the US and has spread to Europe, with Germany german bank Now in the line of fire. UK banks are not immune, with barclays, Lloyds Banking Group, NatWest and HSBC holdings all slipping yesterday.
The crisis is also an opportunity
Barclays shares are down 18% this year, but NatWest is only down a modest 4.21%, with Lloyds down 4.18% and HSBC up slightly 0.07%. The sale isn’t as big as the spooky headlines suggest.
No major problems have yet arisen with UK banks. The Bank of England cracked down on excessive risk-taking after the financial crisis and introduced rigorous stress tests. So far, your efforts seem to be paying off, but there’s always the danger of hidden nasty things showing up.
Lloyds seems protected from contagion by its domestic approach. As the UK’s biggest mortgage lender, he may be hit if house prices plummet, but that’s a different concern. It has a strong Common Equity Tier 1 (CET1) ratio of 15.1%, which measures a bank’s capital against its assets.
NatWest is another UK-focused operator, though given our many financial woes, that’s not entirely reassuring. Once again, it offers protection against problems abroad and has a strong CET1 ratio of 14.2%.
Asia-focused HSBC looks strong for a different reason. It is a large international bank that Bank of America analysts believe it is “built for times like these”, with $327 billion of cash on hand and $184 billion of short-term securities. Hence the stability of the price of its shares in this turbulent year.
HSBC’s CET1 index is the lowest of the three at 13.6% last August, down from 15.8% at the start of the year. Nobody seems concerned.
Barclays has been the most affected by its investment banking operations. It has also clashed with US regulators on a number of occasions, incurring a $361 million fine for violating limits on sales of complex financial products in September.
FTSE bank shares look great value
Barclays has a solid capital base and a CET1 ratio of 13.1%. But after this year’s sell-off, it’s the cheapest of the Big Four banks and, in my opinion, the most exciting opportunity. It has a very low price-earnings (P/E) valuation of just 4.1 and a low price-to-book (PTB) value of 0.3. The expected return is a juicy 6.4%, covered 3.7 times by earnings.
Lloyds is only slightly more expensive with a P/E of 6.3 and a PTB of 0.6. Its expected return is 6.2%. NatWest is valued at 7.35 times earnings, but has a higher PTB ratio of 0.86%. Yields 5.33%.
HSBC has a P/E of 8.7 and a PTB of 0.7, while yielding 4.9%. My concern with HSBC is that it risks being caught up in the widening gap between China and the West. Since its shares haven’t fallen this year, it also feels like a minor opportunity.
Lloyds offers a better entry price and performance than NatWest, but I’ve got it. Barclays looks like the best shot and if I have any cash left I’ll take a stake in NatWest as well.
It is a risky time to buy, there is no question about it, but you may not see another opportunity like this any time soon.
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