The business cycle is clearly turning for the better. Despite weak recent data trends, the UK economy is expected to grow at a robust pace both during this year and the next. And the Office for Budget Responsibility said the UK will grow at 6.5% this year and at 6% next year. Upturns in the economy are good news for FTSE 100 banking stocks as there should be a pick-up in loan growth during expansion.
Improved results for FTSE 100 banks
This is already becoming evident from their recent results. Their financial health is looking particularly better now that they have to make fewer provisions for bad debts. Earlier today, Lloyds Bank enhanced its guidance for 2021 based on improved macro conditions. HSBC and Barclays have also reported better than expected results recently and I think their share prices could rise strongly as a result.
Dividends could increase
These strong numbers should hold them in good stead as we head into 2022. Additionally, improved performances could encourage higher dividends. Since the pandemic started, banks’ dividends have been held back. The authorities asked them to stop paying dividends in light of economic uncertainty last year. They were later allowed to start paying them, but with great caution. So, their dividend yields are still muted.
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Lloyds Bank was a popular income stock before the pandemic. And I believe that one of the reasons its share price has not gone back to pre-pandemic highs is exactly because of its yield. As soon as banks can pay dividends at their own discretion, I reckon its payout could improve and so also its share price. This could happen next year.
Undervalued FTSE 100 stocks
At present, these banks are trading at surprisingly low multiples. I talked about this in a recent article on HSBC, whose price-to-earnings (P/E) ratio is below 10 times, which is almost half that of the FTSE 100 index as a whole. As investors look for undervalued stocks again, I reckon that the likes of HSBC could look attractive. And it may even be possible for the bank’s share price to double from there. I think the Lloyds Bank share price may also continue to rise. And analysts believe that the Barclays share price also has significant upside.
What can go wrong
Of course it goes without saying that all forecasts are simply projections based on current conditions. And as the overall environment changes, these can change too. Indeed, things can change in the blink of an eye. In parts of Asia, coronavirus cases have started rising again. Inflation is expected to average at 4% in 2022, which could also slow growth. And withdrawal of supportive policies could also impact the economy.
What I’d do
But for now, these FTSE 100 banks look like good buys for me. If all goes well, I reckon their prices could explode. I do not have any banking stocks in my portfolio so far, but as the cycle turns, it may just be the right time to put them on my investing wish list.
