FTSE 100 banking stocks have been among the worst hit from the coronavirus crisis. But I reckon that 2021 is set to bring them cheer. Here are two reasons why that could happen:
#1. Green light for dividends
One of the big blows to FTSE 100 banking stocks came when the Bank of England (BoE) asked them to hold back on dividends. It was of the view that in an uncertain climate, it’s a good idea to maintain banks’ cash buffer. Already impacted by the stock market crash of March, this further exacerbated their share price declines.
One example is Lloyds Bank, whose share price fell sharply after the announcement. With its indifferent stock price movements, its unique selling point was its hefty dividend yield, which explains investor disappointment. It has started recovering in earnest only since the stock market rally of last month.
In good news, however, last week BoE decided to greenlight dividends once again. FTSE 100 banks like Standard Chartered have already indicated that they could initiate dividend payouts by as early as February next year. Similarly, Barclays’ return to profits after a loss last year bodes well. The bank has said that it will make a decision on dividends only in 2021, but its results give hope. HSBC is also contemplating re-starting dividend payouts.
#2. Hopes of better economic times
2021 also looks better from an economic perspective. Some improvements are already visible, forecasts for UK’s economic growth are positive and, with Covid-19 vaccinations underway, it appears that it will only be a matter of time before we put the pandemic behind us. Banks’ performances are closely linked to the economy. A growing economy demands greater credit and gives banks the flexibility to increase interest rates.
As it is, the UK economy has responded to the government’s fiscal stimulus. The stamp duty waiver has been a particular success. Banks like NatWest and Barclays have had to tighten lending conditions to meet the growing demand for home loans as housing demand rises, according to a Financial Times report. This is expected to continue until at least the end of March next year.
The downside for FTSE 100 stocks
However, there’s a downside too. We don’t know how the bad loan situation will turn out. If the economic damage turns out worse than was initially anticipated, banks’ financials could suffer. Or a hard Brexit could be a blow to the economy. And the pandemic really isn’t over until it’s over. Banks could continue to reel under adverse new developments.
The takeaway
Still, I’d wait and watch for now. First, I’d look out for their dividend payout announcements. I’d also wait for at least one more set of results to see if their performance improves further, especially since we’ve been in a second lockdown recently and restrictions continue. How Brexit plays out is another immediate concern to me.
But with an improving outlook and more certainty, I think FTSE 100 banks like Lloyds, HSBC, NatWest, Standard Chartered, and Barclays are worth being on the income investor’s watchlist.
