FTSE 100 stocks are well represented within my portfolio. In recent years, stocks on the index have traded at something of a discount versus their American counterparts. But after the correction in March, and a limited recovery, several stocks are trading at even more of a discount.
The sector that was most heavily impacted was financials, followed by housing and several retail shares. The thing is, financial stocks, predominantly banks, were among my top picks before the market panicked after the Silicon Valley Bank (SVB) fiasco.
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Barclays
Barclays (LSE:BARC) isn’t among the most loved stock. I appreciate that. It’s a universal bank, providing commercial lending services to customers and it has an investment arm. The company is a UK-focused bank but has operations around the world.
It’s been one of the cheapest banks on the FTSE 100 for sometime. It’s unloved, and even trades at discount versus it’s less diverse peer, Lloyds, which is entirely UK-focused. It remains highly sensitive to interest rate changes, like Lloyds, but it also has the aforementioned investment arm and operations outside the UK.
The stock hit a year-low in March after SVB imploded. The collapse sent shockwaves around the sector, as investors started to worry about unrealised bond losses. However, these concerns were largely unwarranted, and there’s been a limited share price recovery to demonstrate that.
The thing is, banks like Barclays are very different to the collapsed SVB. It has a diverse bond holding, and a wide range of customers across the corporate and private market. Liquidity is conservatively managed, with a liquidity coverage ratio (LCR) of 156% at the end of Q3.
Then, there’s interest rates. High interest rates are broadly considered good for banks. But that’s not the full story. When rates get too high, defaults increase and impairment charges soar. So, I’m happy to see this rate hiking cycle coming to an end. I think we’re looking at a medium-term rate range between 2% and 3% — that’s ideal for banks.
But in the short term, I’m wary about impairment costs in H1.
So, with Barclays down 10% over a month, I’ve been buying more. It now trades with a price-to-earnings of just 4.9 — less than half the index average. Discounted cash flow suggests it could be undervalued by as much as 74%.
Standard Chartered
Standard Chartered (LSE:STAN) is down 21% over a month for all the same reasons Barclays shares fell. But this Asia and Middle East-focused bank hasn’t recovered as much as it’s peers.
The Liverpool FC sponsor trades with higher P/E than most banks in the UK — trading at 7.5 times earnings — primarily because its focus markets are higher growth opportunities. Meanwhile, its LCR is particularly strong.
Chief Executive Bill Winters recently said that the LCR was 147% before the SVB fiasco, and that it was “substantially higher now” without disclosing the current level.
Once again, near-term high interest rates concern me, but I’m buying for the medium term when the environment will be ideal for the industry. I’ve recently bought this stock as the share price tanked.
